Big firms pass on input costs to consumers, smaller ones struggle
While companies in India grapple with rising input costs, only the bigger ones appear in a position to pass them on to consumers. Low demand is preventing medium and smaller ones from doing so, and this is borne out by the wholesale price index (Wpi)-based data.
WPI inflation eased to a three-month low in July, but was still at an elevated level of 11.16 per cent. However, inflation in manufactured items rose to 11.20 per cent from 10.88 per cent in the previous month. It was in double digits for three consecutive months and stood at 9.44 per cent in April.
So, items such as textiles, paper, chemicals, rubber, plastic, metals, animal oils and so on have seen a surge in inflation in recent times. Inflation in vegetable and animal oil and fats was as high as 42.89 per cent and peaked at a staggering 51.95 per cent in May.
Industries that use these as input cried foul, since they were already hit by high diesel prices.
A commentary associated with IHS Markit Purchasing Managers’ Index (PMI) survey on Wednesday said Indian manufacturers signalled another monthly rise in cost burdens, taking the current stretch of input inflation to 13 months. Survey members linked the cost pressure to raw material scarcity and transportation problems. PMI manufacturing slid to 52.3 in August from 55.3 in July.
India Ratings said in a note that since fuel prices are a cost to almost all manufacturing sectors, either directly or indirectly, higher fuel inflation raises input costs across the board. In addition to fuel cost, the basic cost of raw material, intermediate goods and wages pushes prices up and, in turn, inflation of the manufactured products.
While medium, small and micro enterprises (MSMES) find it difficult to pass on these high input costs to their consumers, big industries are shifting the burden to consumers. Smaller players are, instead, resorting to cutting down wage bills.
State Bank of India’s Group Chief Economic Advisor Soumya Kanti Ghosh says small firms with a turnover of up to ~500 crore are continuously implementing cost-cutting measures, including pruning the wage bill. “While analysing results of more than 3,700 listed entities, we saw a reduction in employee cost by up to 5 per cent in companies with turnover of up to ~50 crore as compared to an increase in 2-3 per cent for large corporations in Q1FY22 over Q4FY21,” Ghosh says.
Says Sunil Kumar Sinha, principal economist at India Ratings: “Two stories are playing out. Large, organised manufacturers are not only increasing their footprint at the cost of the marginalisation of the MSME sector, but they are also increasingly adding the rising input cost to the output cost.” The Reserve Bank of India’s (RBI’S) latest industrial outlook survey, he says, indicates that big companies are likely to continue doing so in the near term as demand normalises.
The 94th round of survey showed that more companies expect profit margins to improve in the second quarter of the current financial year than perceived in the previous round. Respondents expect input cost pressure to continue in the third quarter, albeit with marginal easing, and selling prices to harden.
Sinha says MSMES and unorganised firms are, on the other hand, unable to pass on the input cost for fear of losing the market. “They are under so much duress that they are left with zero risk-taking capacity. So, marginal players are trying to play safe but it is eroding their viability,” he says. Large players in the organised manufacturing sector do not face such a predicament and are, therefore, willing to pass on the rising input costs to the consumers, he adds.
Aditi Nayar, chief economist at ICRA, says elevated input costs have created a conundrum at a time when the domestic demand recovery remains tentative. “Some larger organised players have been able to pass on some price increases to protect their margins to an extent. However, smaller and less formal entities, which have been hit by the disruption caused by the first and second Covid waves, may not have the pricing power to follow suit,” she points out.
Smaller manufacturers are resorting to cuts in wage bill to keep afloat as demand remains low