Cost pressure rising

Over 57% manufacturers say increase is 3% and above

Despite the gloomy demand situation and lower business inflation expectation, manufacturing firms see the cost pressure rising.

The Business Inflation Expectations Survey (BIES) by Indian Institute of Management for the month of April, found that there are clear signs of cost pressures building up among companies, which are mainly into manufacturing.

Over 57 per cent of the firms believe that the current cost increase is 3.1 per cent and above as compared to the same time last year. Over two-fifth of the firms perceive that the current cost increase is over 6 per cent over last year, while over one-fifth of the firms perceive that current cost increase is over 10 per cent.

According to Professor Abhiman Das, RBI chair in finance and economics and chair, Misra Centre for Financial Markets and Economy of IIM(A), the cost pressure could increase due to severe distortion in the supply chain and shortage of labour. The supply chain was broken for several goods during the lockdown period and the return of migrant labourers to their hometowns has created a shortage of labour in cities.

“Given the demand conditions, however low they are, sudden supply shock has been dominating the price dynamics. Supply adjustments in the shortrun could be delayed due to severe distortion in the supply chain and labour market,” he said. “Huge distortion in the labour market may effectively push the labour cost in the short run,” he added.

Further, sudden increase in essential commodity prices, which has been evident from the increase in food prices, will have spillover effect on manufacturing goods, particularly food items.

However, increased government spending and measures to ramp up liquidity will see demand pushing inflation down the line.