How does inflation rob your business?

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Bikky Khosla | 19 Nov, 2013
An encouraging trend in exports, an impressive 8 percent core sector growth in September, a strengthening rupee, a softening CAD and recovering stock markets -- it all appeared positive, but the picture changed suddenly in the last few days with both the Sensex and the rupee suffering a setback on their recovery (though recovered Thursday and yesterday), and more importantly, factory output registering a sluggish 2 percent growth in September, and inflation, both wholesale (7 percent) and consumer price index (10.09 percent), spiking up all over again in October.

I would like here to invite your opinion on high inflation and its affect on your business. How much you feel pinched by cost increases - energy, raw materials, machinery and components, office maintenance, supply chain, insurance, and other costs. Do you think the shoot up in prices is putting a spoke in your factory wheels? And if you are a small business, do you find it difficult to negotiate with your suppliers because of your size? Can you easily pass the extra costs to customers? Do you often suffer due to sudden price rises as you're already under contract to deliver goods at a set price?

And there is a double whammy effect of inflation -- every time it rises sharply, it also raises chances that the RBI may lift interest rates further in its next monetary policy and thus would further worsen the credit flow to the industry which has long been facing a difficult time due to costly credit. This time again, a RBI policy review is ahead in the next month and it is widely feared that the high inflation figures will keep the RBI singing a hawkish tune in an effort to tame down roaring inflation -- a strategy that has hit industry hard in the past.

Now let's have a look in which areas our industry is not performing as reflected by the September IIP figures. The manufacturing sector, which constitutes over 75 percent of the index, grew by a meagre 0.6 percent in September despite double-digit growth in exports in the month. In addition, capital goods output slumped by 6.8 percent and consumer durables contracted 10.8 percent, indicating that both business and consumer sentiment have still remained weak.

I don't think the recent setbacks are strong enough to drag down the economy, neither the industry has turned the corner, but it is clear a true revival is still some way away, and at this juncture while the industry shouldn't be jittery, the policy makers shouldn't be complacent, and the latter should leave no stone unturned to propel industrial growth as well as exports and to rescue the industry, particularly the small and medium enterprise sector, from the labyrinth of high inflation the reaction to which I don't think should always be interest rate hikes. Removing supply hurdles and infrastructure bottlenecks is no less important.