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If it wanted to get ahead of the inflation challenge, India’s central bank should have paid more attention to Surf Excel. The price of this detergent went up by 20% in January. While that’s hardly news when most daily-use items are getting dearer, the interesting part was the retail price before the change: 10 for a bar. Such tiny bars of detergent are aimed at consumers who are often unable to spend a rupee more without having to cut back on something else. To prevent these customers from downgrading to cheaper products, Hindustan Unilever (HUL) relies on “magic price points"—such as 5 or 10—that help buyers stay within tight budgets. “Almost 30% of our business comes from packs that operate at magic price points," Ritesh Tiwari, chief financial officer of HUL, said recently. For these packs, weight cuts are common. “As a result, even the same number of units sold leads to volume decline."

Which is why most of the 11% growth in HUL’s sales in the last quarter of 2021 came from price hikes. The underlying volumes rose only 2%. Rivals fared worse. India’s broader consumer industry saw volumes fall, with rural areas seeing a 4.8% decline, compared with a 0.8% drop in cities, according to NielsenIQ.

As India’s largest consumer business, HUL managed to walk a tightrope between quantity and price. But then commodity cost pressures became too intense to keep up the illusion of affordability. Hence, the January mark up of a 10 Surf Excel bar to 12. This capitulation of some small packs to non-magical pricing—plus the 41 mentions of “inflation" on HUL’s December quarter earnings call—should have given the Reserve Bank of India (RBI) a warning: costs were weighing too much on the profitability of even large firms for them to go by the niceties of consumer psychology.

Yet, to delay what even then looked like an inevitable increase in interest rates, RBI in February projected inflation at a benign 4.5% for 2022-23. Its first rate hike—a 40 basis point move—came on 4 May. By then India’s inflation problem was entrenched and getting worse. Last month, a 500-ml pouch of Vim dishwashing liquid went up from 1 less than the magic price point of 100 to 4 more.

Pranjul Bhandari, India economist at HSBC Holdings, estimates that only about half the increases in input costs over the past six months have been passed on to output prices. The cost pass-through is faster in rural areas where unregulated prices of kerosene and bulk diesel have risen faster than regulated prices of electricity in cities, she says. “As electricity tariffs are raised over the next 12 months, the urban cost of production and living could hurt growth."

Not only electricity. Services demand is still trying to catch up with pre-pandemic levels. As today’s recovery in contact-based industries like travel progresses, they will pass on some of their own cost pressures, mimicking consumer-goods firms. Add expensive food to this list, and it’s unclear if April’s 7.8% inflation rate will go back to 4%—the midpoint of the central bank’s tolerance range—any time soon. That muddies the outlook for how high India’s interest rates need to go and how much output growth will have to be sacrificed for prices to get back within RBI’s target range.

Repricing and repackaging don’t always work out as envisioned. When companies cut weights to defend prices, they also hope that the consumer will return more often. That doesn’t always happen. Operating at magic price points is like running a high-school experiment in ‘titration’, dripping a liquid of known properties into another of unknown concentration and stopping when the colour changes. Except that unlike any substance in the lab, the consumer is an active participant in this experiment. In a country where families earning less than the median household income of roughly $2,300 account for only 10-15% of overall consumption, a large number of people “would be very conscious about the money outlay and they would be titrating the volume to protect their wallet because their wallet is so small and so limited," HUL chairman Sanjiv Mehta said on the earnings call.

At 8.3%, inflation in the US is also stubbornly high, but at least unemployment there is at a low 3.6% and hourly earnings are rising. In India, it was only in April that employment surged by about 7 million after a cumulative decline of 10 million in the previous three months, according to the Center for Monitoring Indian Economy. Of the 900 million eligible to work, only two-fifths are employed or looking for jobs.

Perhaps India’s central bank wanted a stronger labour market recovery before hiking rates. But at least in January—a month before the start of the Ukraine war—it should’ve caught the worrying signals of magic prices. Now it’ll have to work harder both to slay inflation and compensate for its loss of credibility.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.

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