Reluctance to lower prices a hurdle for growth

Indian currency

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The economic value of cutting prices should not be underestimated. In March 2004, Procter & Gamble cut prices of Tide by 47% and Ariel by 28%, challenging Hindustan Lever’s pole position in this market. HLL responded in like and a furious battle ensued. How this ended is another story. What’s relevant is this: P&G’s volume growth did increase, but HLL’s growth did too, and so did its market share. Lower prices improved affordability and more consumers bought their products.

This example comes to mind as one sees a marked reluctance all around to cut product prices, despite falling input prices. Companies want the government to reform, invest in infrastructure, protect them from cheap imports, but forget that they can spur spending.

Consider banks. The central bank said it will not cut rates, on 7 April, but wants banks to pass earlier rate cuts to borrowers. It had already cut the policy rate by 50 basis points in 2015 but loan rates did not decline. Banks say borrowing costs are still high and bad loans are a worry.

They stood their ground initially but by evening on 7 April most big banks cut their base rate, even if by a measly 15 basis points. They could have done this earlier too. Nothing changed in a day, except for the central bank wielding a stick.

Lower rates could coax fence-sitters to go ahead with their purchases. Does a 15 basis point cut mean that much? No, as this article on Firstpost explains. But if rate cuts continue, at some time the cumulative impact will be significant.

Home loans may become cheaper, but what about the home itself? Builders have held on to unsold inventory, rather than cut prices and accelerate sales. Protecting margins is coming at a stiff cost. Higher sales mean better cash flows, which builders can use to repay expensive loans or fund new projects.

This trend is not restricted to big ticket items. Dairies are paying less for milk, Rs 20-21/litre, down from Rs 29-30/litre a year ago, says this article in the Indian Express. But retail prices are unchanged, at about Rs 38/litre in Mumbai and Delhi. How is that justifiable?

The Indian steel industry wants protection from cheap Chinese steel imports. But Russian steel too has turned cheaper. Global steel prices are falling. If Indian steel was competitively priced, imports won’t stand a chance.

India’s economy is benefiting from a sharp fall in prices of crude oil prices and a number of commodities, from metals to agricultural products. If passed on, lower costs can put more money in hands of consumers and drive up consumption and set a virtuous cycle in motion.

There is a risk that sales may not improve. But that’s a chance companies should take. If consumers see interest rates, home prices and products all becoming cheaper, consumption should improve. Passing on cost savings in full may be just what the doctor ordered for the economy.

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