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Consumers will have to spend more to buy essential food articles due to rising inflation and so they may postpone buying consumer products.
Rising food prices are likely to affect sales of consumer products as consumers will have to spend more money on food articles, said analysts.
"With spiralling food prices, the 'wallet-share' of consumers is expected to tilt towards food products and away from consumer products," said Anand Rathi Financial Services Ltd, in a research note.
Higher food prices would also result in more working-capital for retailers (kiranas) and it could lead to some de-stocking by them. "We expect that this might impact new products and slow-moving ones. This trend would drive revenue for companies with a greater proportion of small stock-keeping units (SKUs).
Furthermore, it might compel companies to raise retail margins and incentives", the note added.
India faced the curse of drought and floods in 2009 that saw consumers paying towering prices for vegetables, pulses, sugar and foodgrains. India's annual food inflation declined 1.3% to 18.65% for the week ended 12th December from 19.95% the week before.
With the economy on an upswing, analysts said rising food prices should prompt the government and the Reserve Bank of India (RBI) to shift their focus on controlling inflation, otherwise manufacturing inflation would also go up. However, the authorities feel that food inflation cannot be controlled by the monetary policy alone.
"It is food inflation which is a substantial part of inflation right now. So there is not much that can be done by other policies, including monetary policy," finance secretary Ashok Chawla had said.
The sharp rise in the WPI inflation driven by the relentless increase in prices of primary food articles is likely to be a key concern in the near future. Moreover, with the revival in global economic activity, the demand for crude oil is likely to witness an increase in 2010, leading to a rise in international oil prices. This, in turn, is expected to exert upward pressure on the domestic prices of minerals oil.
With the lower base of November 2009, prices of most raw materials have been rising. The prices of most agro-products have gone up by more than 30%.
Especially, sugar prices in November rose 90% to Rs3,456 per quintal compared with the same month past year. However, some items like copra and soda ash continue to be sold at 26% and 13% lower prices, respectively, from a year ago. Liquid paraffin and LAB prices are also lower by 48% and 12%, respectively from last year. In November, palm oil has shot up 58% to $718 per tonne on a year-on-year basis.
During November, coffee prices rose by 46.8% to Rs9,567 per 50kg from the year-ago period; however, on a month-on-basis, it has fallen by 19%. "The month-over-month drop in coffee prices would benefit Nestle and Hindustan Unilever. Higher prices of agricultural products are expected to hit Britannia.
Lower prices of crude oil derivatives are expected to help personal-care companies like Hindustan Unilever, Emami, Dabur and Marico. Higher packaging material costs are expected to affect all companies," said the note from Anand Rathi Financial Services.
Food price inflation is generally stoked by supply-side concerns rather than demand-side concerns. Therefore, the food price inflation should be tackled by removing the bottlenecks in the supply side, like increasing the supply of food stocks in the market.
Attributing rising prices to supply-side constraints, Suresh Tendulkar, former chairman of the Prime Minister's Economic Advisory Council (PMEAC), had said that the RBI could take steps to withdraw liquidity to tame rising prices. The apex bank is slated to announce review of its annual credit policy next month.
RBI, however, might look at ways to curb this inflation spike creating second order impacts like wage hikes due to stoking of inflation fears. Persistence of this trend may result in increase in the interest rates or tightening of liquidity to erase any minimal contribution done from the demand side.
"The food articles inflation is already at an alarmingly high level and given its deeper socio-economic implications, it has the potential to derail overall economic recovery if timely action is not taken,” said Kaushal Sampat, chief operating officer, Dun & Bradstreet India.
The global financial crisis that spilled over into its second year choked flow of foreign direct investment (FDI) into India in 2009
The global financial crisis that spilled over into its second year choked flow of foreign direct investment (FDI) into India in 2009, forcing the government to loosen rules for investments. However, the government kept multi-brand retail off-limits to foreigners, reports PTI.
In the first nine months of 2009, FDI dipped by 26% to $21.40 billion from $29 billion a year ago. The total FDI inflow into India since 2001 crossed the $100 billion mark.
Although fund inflow was constrained, FDI became the cause of confusion over the issue of ownership patterns of seven Indian lending institutions, including ICICI Bank Ltd and HDFC Ltd.
But these institutions have maintained that they are Indian as they are controlled by Indian banking regulations, and have Indian Boards and management.
While the Union government simplified norms aimed at attracting more FDI, it has yet to get the Insurance Bill approved by Parliament. The Bill seeks to raise the FDI cap in the insurance sector to 49% from 26%.
The year also saw the Organisation of Economic Cooperation and Development (OECD) and global firms including retail giants like Wal-Mart asking India to open the lucrative multi-brand retail sector for FDI. However, opening up of the retail sector does not appear likely in the near future.
On a global scale, OECD estimates suggest that total FDI into the 30 OECD countries will fall to $600 billion in 2009 from the 2008 total of $1.02 trillion.
Since the epicentre of the crisis was in the US, India was one of the few nations which remained relatively stable.
Economists say that foreign investment in India was good and remained buoyant as the domestic demand was good and the economy exhibited robust growth, despite the global downturn.
"Capital is chasing opportunities," CRISIL chief economist DK Joshi said, adding that capital coming to India is not a surprise.
The OECD wanted India to liberalise its FDI, especially in the retail, banking and insurance sectors—the key areas of interest for global investors.
“India’s policy on multi-brand retail acts as a social security net for millions of small retail traders in the country," commerce and industry minister Anand Sharma said recently. A Parliamentary panel has already suggested a blanket ban on FDI in the retail sector.
The year 2009 also saw intensive efforts like road shows in Europe by different ministries—including those for textiles and roads—to attract FDI.
OECD secretary general Angel Gurria recently said, "India’s FDI performance and progress in the past year has been particularly strong, even in a very tough global environment."
Positive comments from the finance minister helped the Indian bourses to gain momentum
Indian markets bounced back to positive trends on the back of positive comments from the finance minister on economic growth, along with strong global markets and high advance tax payment by India Inc. The Sensex shot up 539 points from the previous day’s close, ending the day at 17,231, while the Nifty closed at 5,145, up 159 points.
Adhunik Metaliks has signed definitive agreements with India Infrastructure Fund (IIF), managed by IDFC Project Equity Company Ltd, for an investment of Rs2,500 million in its power subsidiary Adhunik Power & Natural Resources Ltd towards part-financing the equity of its ongoing 540MW
coal-based merchant power project at Jamshedpur, Jharkhand. The project cost of Rs26,500 million is being funded through a debt-equity mix of 3:1. The stock zoomed 11%.
During the day, the government has asked market regulator SEBI for more details of a probe into a case of alleged routing of funds by Reliance Industries to dummy companies for buying its own shares in 2000. However, the stock was up 5%.
Adani Power rose 2% on reports that the company’s subsidiary Adani Power Maharashtra had secured a contract for supply of 1,200MW of power from the Maharashtra State Electricity Distribution Company.
Hotel Leela Venture rose 3% on reports that the promoters were increasing their stake through creeping acquisition and plan to take their stake to 55% from the current 52.5%. Shriram EPC won orders worth Rs156 crore. The stock remained flat.
Finance minister Pranab Mukherjee said that the government will wait until the February 2010 budget to consider withdrawing some of the fiscal stimulus measures. He said that inflation and fiscal consolidation are major challenges in the short- to medium-term. Growth outlook for the second half of FY 2010 looks better, he added. The finance minister also said that farm output must grow 4% for the economy to expand 9%-10% annually. He said that industrial production has started picking up.
Mr Mukherjee said that sustaining higher growth remains a priority for the government and the Centre is open to making changes in the draft direct tax code. The draft code has proposed various reform measures, including cutting corporate tax rate to 25% and streamlining tax laws.
During the day, Asia’s key benchmark indices in Indonesia, South Korea, Singapore, Taiwan, China and Hong Kong rose by between 0.35%-1.12%. Japanese markets were closed on account of the emperor’s birthday.
The People’s Bank of China said that the economy’s recovery is still insufficient and that correcting structural problems for the nation’s growth is urgent. The bank also added that it will seek to keep policy flexible and will focus on decreasing economic volatility and manage the pace of loan growth.
On Tuesday, 22 December 2009, the Dow Jones Industrial Average was up 51 points while the S&P 500 and the Nasdaq Composite were up 4 points and 15 points respectively.
As per reports, USA’s third quarter GDP increased at a slower-than-expected annualised rate of 2.2%, lower than consensus prediction. The housing data provided some relief. It showed that existing home sales climbed at a stronger-than-expected jump of 7.4% to 6.54 million units in November 2009. US treasury secretary Timothy Geithner expressed confidence by saying that the US economy was on a solid recovery path, but said that tight lending practices by banks still poses a risk.
In premarket trading, the Dow was trading 30 points higher.