Click to play videoUnion Finance Minister P Chidambaram had on Tuesday asked Indian companies to cut prices to boost demand and tide over the economic slowdown. "The classic response to a demand slowdown is to cut prices," Chidambaram had said at the India Economic Summit in New Delhi.
However, many companies have ruled out a cut in the prices of their goods and services.
So even with most of the developed world in the grip of recession and the rest of the world witnessing economic slowdown, Corporate India is openly disagreeing with the Finance Minister.
Although they have turned down Chidambaram's request for price cuts, many wonder if price-cuts is really the only and best solution to beat slowdown?
CNN-IBN’s show Face the Nation debated: Is price cut the best solution to beat a possible slowdown?
The panellists included Vice-Chairman of Mercury Travels, Ashwini Kakkar and the Managing Trustee of Consumer Voice, Sri Ram Khanna. The debate was moderated by Senior Editor Sagarika Ghose.
Sri Ram Khanna began the debate by saying that the prescription given by the Finance Minister P Chidambaram was indeed the cure for slowdown in India.
“I agree with the Finance Minister that if you don’t bring the prices down, the consumers are not going to come back to the markets. They are going to save, they are going to hoard because they will think that a bigger storm is in the offing. Psychologically and sociologically there has been a negative impact of the western recession. We believe that the western recession will stay on for at least two and a half to three years and it will have a negative impact as is visible in the export-oriented industries. It is visible in the stock markets where the flight of capital has taken place and taken the dollar price to Rs 50. People are saving and going for bank deposits. They are not spending money. Thing are not as bad as it could be because we are still going to end up with 6.5 to 7 per cent growth rate as compared to the minus rate predicted for the USA, Europe and Japan,” argued Khanna.
So why doesn’t the aviation sector bring down prices of travel and consignments even though aviation turbine fuel prices have been cut. Afterall, the situation is not yet as bad as it is in the US.
Kakkar, too, responded by claiming the if the aviation industry lowers price, it will tide over the slowdown and also come out of the red.
“It is true that in traditional economy everybody says that the demand and supply curve should decide prices. But this is a unique situation and globally we are witnessing a socialistic response to a capitalistic problem. To me it seems that the Finance Minister sitting on his higher perch can probably see further than all of us. He is putting everybody in the country in one basket. He is saying ‘I am willing to look at tax cuts, I am looking to boosting of exports, I am willing to see that easy credit is available, I am willing to put money behind the rupee in terms of the dollar-rupee exchange rate’. He is trying to do a lot of things on his own but also on the other side asking the industry for a price cut,” Kakkar said.
“Looking at airlines, he first cut the taxes on aviation turbine fuel and then he gave them extended credit period. After that the prices of fuel were brought down by the oil companies, which was an inter-ministerial debate. Despite that, the airlines did not cut down the price. Clearly he is a bit miffed about that. Also the airlines are in a conundrum over the situation as by the end of this year they are going to show a loss of Rs 6000 crore. Even if they lower prices, the seat load factors aren’t going up and demand is stuck. We have been seeing this month after month. This is a great dilemma and I think the best solution to this might be for the airlines to start cutting their prices and see an increase in their seat load factor which will help them to come out of red,” he added.
Khanna was critical of those industrialists who had ruled out a price cut and pointed that that in India many sectors were overpriced.
“What Bajaj means is that there are three major operators in his industry and it is an oligopoly pricing model. If he brings down the prices, others will do it too and he will not gain. But there are many industries where there is monopoly kind of competition and the channels of distribution are small. So in an industry where there is competition the benefits will go to the consumer. Wherever the supply chain of distribution is short, the gains will go. These conditions are there in the real estate sector, in the airlines industry, and in the automobile industry. Hotel rooms in Delhi cost four times more than in Bangkok. Our hotel industry is overpriced,” Khanna replied pointing out to Bajaj Auto Ltd Chairman and Managing Director Rahul Bajaj’s statement ruling out price cut.
“The situation is ripe for a price fall in the real estate sector, in the airlines industry, and in the automobile industry. Let me also remind Rahul Bajaj and his friends that this country is going to grow for the next five years based on the engine of domestic demand. If domestic consumers don’t buy you can say goodbye to the seven per cent growth. You have to stimulate demand whether they do it by interest rate cuts or by bringing down prices. Until prices come down people are not going to buy,” Khanna added.
Khanna agreed with Sagarika that Indians have money but added a caveat that they don’t know what will happen in the future. He also blamed the media for stoking the slowdown fears.
So are industries like real estate and automobiles being greedy? Are they eyeing too much profit?
Kakkar replied that despite a reduction in input cost, real estate companies were not cutting prices.
“There is case for what the Finance Minister is saying. For example in the real estate industry, steel prices have come down, cement prices have come down. Retail financing has cut costs and so is it done by banks, especially State Bank of India and yet prices are not being reduced. At one level you can say that if my competitor reduces price then my market share will not increase and so on and so forth. But at another level the pyramid of consumption, if prices come down more people can afford the product and therefore sales will go up. If sales go up as the Finance Minister is projecting then the whole industry will benefit. For where the Finance Minister is sitting he can see more and I dare say he is exhorting us towards prudent economics. He is saying do these before you get back into the hindered rate of growth again or get into a recessionary mode or people start losing jobs. Then the situation becomes worse. Listen to his advice in the overall context,” he concluded.
Final Web/SMS poll results: Is price cut the best solution to beat a possible slowdown?
Yes: 69 per cent
No: 31 per cent
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