A few months ago when the rupee hardened against the dollar from around Rs. 42 to a little over Rs. 39, exporters raised a huge hue and cry. The point made was that this around 8 per cent appreciation rendered Indian exports uncompetitive. They put pressure on the commerce ministry for special relief packages.

Today the situation has changed dramatically: the rupee has depreciated against the dollar by almost 25 per cent, with current price hovering around Rs. 50 to a dollar. This steep depreciation of the rupee should have made our exports extremely profitable. But lo and behold! There is now the big hue and cry about markets, especially, the US and in Europe severely affected by recession resulting in shrinking demand. There is now the plea for special support for export efforts!
Commerce minister Kamal Nath, boasted on how well the Indian economy was managed and derided the US and other developed nations for their financial mess. Amidst his pre-occupation with elections in his home state of Madhya Pradesh, he has little time to find an effective solution to the trade issue.

Export growth affected

The going was good up to end August. In the first of the five months of the current financial year, export growth was at a handsome 35 per cent. But export performance through September and trend of exports through October point to a steep decline. This is understandable in the context of the heavy dependence of exports on the US and the European countries both of which are presently passing through difficult times. The ambitious target of $ 200 bn set for exports, marking a near 25 per cent growth over the $ 162 bn of the previous year, is not going to be easy in the changed circumstances. But noblesse oblige. Kamal Nath has been quick to offer new sops like clapping import duties on steel and a fairly stiff 20 per cent custom duty on import of crude soybean oil.

Steel companies never had it so good as they had in the last six years. Large steel makers, including the public sector giant SAIL and Tata Steel, earned profits in a quarter, they never had for years together upto 2003. Edible oil prices are already ruling so high; gingili oil is priced over Rs. 150 a litre, a price level unheard of. Price stability can be ensured by a judicious use of imports. This is not the time to lose advantage of cheaper imports. The powerful oil lobby has already hoisted the flag demanding more reliefs and clamour for similar duty on crude palm oil and refined edible oils also. With elections to several states underway and to the Lok Sabha not far off, it would indeed be suicidal for the UPA government to keep prices of such an essential commodity like edible oil so high. The resort to consumer subsidies on the lines of DMK's Tamil Nadu government is riddled with efficient delivery, leakages and corruption.

Kamal Nath is campaigning hard for assembly elections in Madhya Pradesh with the possibility of him becoming the chief minister in the event of the Congress winning a majority. It makes for eminent political sense in the light of the uncertainty of the UPA retaining power at the Centre. It is in his interest to help keep prices low.

Finance minister P Chidambaram made an eminently sensible suggestion to captains of industry at the World Economic Forum: endeavour to economise on costs and reduce consumer prices. This, PC felt, will help improve demand and in turn enable industry to operate to fuller capacity. Sadly, this advice was instantly shot down. The chief priest of the Bombay Club, Rahul Bajaj, cried aloud and said that the two wheeler industry has already been working at a low margin, of just around 4 - 5 per cent and that he did not foresee any price cut in the near future. He was promptly followed by Brij Mohan Munjal, chairman, Hero Honda Motors with the familiar reasoning that wages were rising, fuel prices had increased and cost of electricity risen... One needs to look at the balance sheets of Hero Honda Motors and Bajaj Auto over the last five years for the profits the companies had earned which should give them enough leeway for adjusting to the vagaries of the business cycle.

Focus on cost reduction...

In seminar after seminar, one is bombarded by experts, desi and phoren, over the enormous scope for improving competency through a focus on costs. CII has been conducting regularly the Cost Congress in which the recurring theme is building organisational competitiveness through total cost management. Management expert M K Raju repeatedly says that every industrial unit has enormous slack that would lend for handsome cost economies at every stage.

Germany and Japan do it all the time

Germany and Japan, the global leaders in manufacturing, have proved this time and again: the German currency, Deutsche Mark, appreciated against the rupee from around Rs. 1.30 in the early 1960s to around Rs. 25 per DM over the next 25 years. There was appreciation in relation to other major currencies as well. Yet through these three decades, German exports boomed and the country continues to maintain her status as the largest exporter of the globe.

Similar is the case with Japan: in just about 20 years, the Japanese yen has appreciated from 20 yen a rupee to less than 2 yen a rupee. German and Japanese goods are still sold in humungous quantities world over. Intense research and continuous improvements have enabled the IT hardware industry to maintain spectacular growth through massive price reductions and, with improved features, year after year for the last decade.

It is not as if such experiences are unknown in India: Maruti (Suzuki) has been a good example of maintaining prices and even coming out with price reductions through cost improvements and increasing volume of production. Ratan Tata was audacious to announce and proceed with making the cheapest car in the world at $ 2000. You just do not have the possibility of producing a car with such basic comforts in other parts of the world at this price.

I wonder why finance minister Chidambaram would not intelligently use the excise mechanism to bring about his desired focus on prices. He could consider, for instance, a much lower level of excise duty for products that are sold below a certain price level; he could also induce banks to reduce interest rates for loans extended for the purchase of such consumer durables priced low. The boom enjoyed by housing, cars and two wheelers for nearly a decade from 1998 was built on affordable pricing and low finance costs.

Why can't flat prices come down?

I was disappointed with another Rahul Bajaj-type comment from the real estate tycoon K P Singh, chairman, DLF. Riding the crest of the real estate boom and with his massive land banks Singh emerged among the richest of the world. The acquisition of large areas of land spread all over the country and the huge increase in land prices through the last five years, helped make DLF among the leading corporates. Flat prices zoomed from around Rs. 1000 / sq ft hardly five years ago to more than four times today. There have been sympathetic increases in the price of every construction material and labour. Until recently, the market cap of property developers hit the roof and share prices zoomed. Remember the Rs. 100 crore plus spent by DLF as the principal sponsor of the Indian Premier League earlier this year?

Of course this sector has taken a strong hit when liquidity became tight and interest costs shot up; share prices of these companies have nose dived. Like Rajul Bajaj, K P Singh was also quick to repudiate the possibility of a reduction in prices but said gratuitously that the ideal interest rate on housing loans should be around seven per cent.

I have been advocating low interest for housing triggered by the NDA government along with a vast range of tax concessions. But like Chidambaram, I would also like business to play its part to stimulate consumption by focusing on costs and offering products and services at lower prices. It indeed is a paradox that luxurious property built over sprawling suburbs of Chicago should be cheaper than those in Indian metros! Contrast this with the vast difference in the purchasing power of the citizens of the two countries!

When airfares fly high...

The finance minister can test his hypothesis in respect of public sector undertakings like SAIL or Air India. The latter perhaps can provide the lead: in the last four years when budget airlines competed vigorously for a share of the booming air travel market, Air India (Indian Airlines), in line with competitors, offered highly competitive rates. Earlier this year a Chennai - Delhi - Chennai ticket could be purchased for around Rs. 5000. Cheap tickets contributed to a huge increase in travel by air and a number of airlines introduced new routes, increased frequency...

When fuel prices shot up earlier this year, airline companies could not maintain these low fares. With the steep increase in the price of aviation turbine fuel, which contributed to the lion’s share of operating costs, airlines drastically cut down their services and also resorted to steep and frequent increases in fares. Today the lowest fare on a return ticket to Delhi offered even by budget airlines is around Rs. 11,000. A more than 100 per cent increase in just about six months. Air India prices its fares at an even higher level. The two leaders, Jet Airways and King Fisher, enjoying patronage from the private corporate sector continue to keep their fares at even higher levels. The government reduced thrice the duties on ATF and has been working towards a uniform low rate of sales tax of just around 4 per cent. A few state governments have already lowered the rates of sales tax. But airlines had not so far bothered to pass the benefit of lower ATF prices to the consumer.

The civil aviation sector proved the claim of Chidambaram most visibly: low fares contributed to an unprecedented surge in air travel. The corollary was also true: steep hike in fares instantly resulted in a precipitous fall in custom.

Sadly, Indian industry does not believe in any gestation during which a business builds custom and market share. The expenditure incurred during this period should be treated as investment. This seldom happens. Second and, more important, there is the tendency to expect a market to grow and grow all the time. Having this unrealistic expectation, there is no provision or inclination to reconcile to a low ebb in a business cycle.