Booster dose #1: Petrol and diesel prices reduced

The Indian government has been attempting several measures to boost economic growth. From today, petrol and diesel prices have been reduced by 10% and 6% respectively due to a sharp fall in crude oil prices. The Indian government is in the midst of putting together a package to prevent a recession.

After oil price cuts, the RBI has lowered interest rates and a fiscal package is shortly on the cards. The Indian economy which was growing at 9%-9.5% is expected to grow at 7% in FY09 and slow down further next year. What will this price reduction do? The diesel price reduction is critical. A large proportion of agricultural and industrial goods are transported by road and raw materials too are brought in by road. A 6% drop in diesel prices will allow truck operators will lower costs across the chain.

Truck operators may have to pass on the entire reduction, however, as companies will force them to do so. Service industries too will benefit as transportation plays a key role in these sectors. The petrol price reduction is a feel good for consumers, who will save a little extra every month, useful to pay for those expensive veggies and groceries. The benefits of the fuel price reduction can be seen only when industry decides to pass on the benefits of lower input costs.

Industrial fuel prices have already been reduced which lowers energy costs. Recent months have seen almost all commodity prices fall and companies’ input costs have certainly fallen, even accounting for long term contracts. But they seem to be holding on to margins, rather than lower prices and stoke demand.

That’s the classic mistake that companies did in the mid-nineties when inflation crossed 12% and lending rates crossed 20%. It took a long painful period for companies to emerge from that abyss. Even now, the government can only do so much: make credit cheaper, do its bit to make inputs cheaper. But a pick up in demand is in the hands of the consumer. The price rise in the past few years –both in assets and consumables- has crippled his savings. Rising incomes cushioned the impact but now the job scene is uncertain. And will remain so till companies see business pick up.

And business will not pick up till the consumer starts buying again. That’s as vicious a circle as any. As for projects, they will not come up if companies do not anticipate demand picking up. They will be delayed or shelved, Tata Steel has already said it will delay some of its projects and will focus on those projects that help it secure raw material supplies. That’s another part of the vicious circle. The onus then is on companies to lower product prices, either through discounts or straight price cuts; only then will the consumer start opening up his purse again.

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