Indian companies have cautioned that rising input costs would likely impact their profitability, as they are unable to pass on all the increases to their customers. The rise in input costs—chiefly metal commodities—started in mid-2020. The continuing rise in prices of commodities and several manufactured goods triggered a 4.2 percent jump in the wholesale price index (WPI) for February 2021 from a year ago—its fastest climb in 27 months.
Inflation data published by the office of the economic adviser in the ministry of commerce and industry shows that the WPI had been creeping up month after month since June 2020 and gathering pace intermittently, after slipping since the beginning of 2020. The general index rose 6.7 percent between June 2020 and February 2021. India had begun normalising economic activity after a country-wide economic lockdown on June 1.
Also Read: February WPI inflation at 27-month high
The sharp rise in prices of metals, iron and steel in particular, and petroleum put the most pressure on the profit margins of companies. The wholesale price index reading for iron ore climbed 44.3 percent between June and February and that fed the rise in the price index of its two products—sponge iron and pig iron—that are key inputs for making steel.
Sponge iron climbed 33.8 percent and pig iron 23 percent during the period under review. This drove up prices of most steel products including semi-finished steel. A rise in steel prices affects all infrastructure projects and user industries making everything from pressure cookers to automobiles.
Also, affecting user industries was the rise in the prices of chemicals and plastics. Chemicals and chemical products climbed 5.8 percent during the period, with monoethyl glycol rising 39 percent, sulphuric acid 78.3 percent, acetic acid and its derivatives 53.5 percent and polypropylene 33.2 percent.
Monoethylene glycol is a vital ingredient for the production of polyethylene terephthalate (PET) resin and polyester fibres and films while polypropylene is used for packaging consumer products and making plastic parts. Sulphuric acid is one of the most important industrial chemicals and put to a wide variety of uses ranging from the production of fertilisers, refining petroleum and processing metals. Acetic acid is a chemical reagent and an industrial chemical that finds usage in the production of soft drink bottles, synthetic fibres and fabrics and several household applications.
Among rubber and plastic goods, polyvinyl chloride (PVC) fittings and other accessories recorded a 40.7 percent rise between June 2020 and February 2021, even as PVC prices climbed 22.4 percent. The rise in PVC fittings increases costs for the infrastructure and construction sectors.
Fast-moving consumer goods manufacturers too were hurt by the rise in inputs costs—of raw materials, chemicals and packaging materials.
Input price impact was mixed for processed food manufacturers. Primary food items, except for pulses, rose just 0.9 percent. Pulses rose 6.1 percent between June and February.
What About Food Prices?
Cereals turned cheaper while the prices of vegetables and fruits rose marginally. Oilseed prices climbed sharply, with sunflower seed prices rising 40.3 percent and soyabean rising 18.5 percent. Other input costs rose.
As a result, wholesale prices of factory processed food rose 6.7 percent during this period, with prices of cooking oils and fats registering a 27.4 percent jump.
The rise in prices will hurt profitability until companies manage to fully pass on the increase in costs to consumers. For the present, companies are absorbing a part of the rise in costs as demand remains tepid, and that should provide consumers with some comfort.
What the Price Rise Means For Companies
The Bank of America Securities in its latest research note to investors has said that inflation won’t be a worry in the next fiscal year notwithstanding the 5 percent year-on-year rise in consumer price index (CPI) for February. It sees average inflation slipping to 4.6% in the first half of the calendar year 2021 due to base effects, weak demand, good monsoons and low imported inflation.
However, it is usual for inflationary patterns that are seen in the WPI normally to show up in the CPI with a lag of two months. Occasionally, a divergence is seen in the movement of the WPI and the CPI over a short period. For March 2021, BofA Securities has estimated that the CPI would rise to 5.2 percent, from a year ago.
The CPI became a more closely watched price index after the Reserve Bank of India decided to adopt it as a key measure of inflation for determining policy action in April 2014. However, it does not capture the inflation that businesses face.
The WPI is a better indicator of the country-wide inflation as well as inflation that businesses experience. One of the drawbacks of the WPI is that it does not capture the inflation of services.
A plan to introduce a producers’ price index to capture inflation of goods and services that businesses experience is yet to materialise.