MUMBAI (BLOOMBERG) - Indian manufacturers are running out of capacity to absorb rising input costs, with an increasing number passing these along to consumers in an economy already grappling with Asia's third-fastest inflation and an uneven recovery.
Companies from the Indian units of Unilever and Suzuki Motor to home-grown JSW Steel are raising prices in response to the global supply squeeze made worse by the surge in energy costs following Russia's invasion of Ukraine.
Higher retail fuel prices are also threatening to hurt demand just as the economy returned to its first full year of growth after the pandemic-induced 6.6 per cent contraction in the fiscal year ended March 2021.
"Inflation remains unabated and is a cause of concern for the second year in a row," said Mr Ankush Jain, chief financial officer at Dabur India, one of the nation's largest consumer goods companies.
As pressure on margins loom, Dabur plans to go for calibrated price increases, besides rolling out cost optimisation measures to mitigate price pressures, he said.
Companies passing on costs will add to inflationary pressures, but the consumer price-targeting Reserve Bank of India (RBI) has maintained that the current spike is supply driven and best dealt with by the government. Policymakers, who will meet this week to decide on interest rates, have signalled that they may revise their 4.5 per cent inflation forecast for fiscal year 2023 but do little else to tighten settings for fear of hurting growth momentum.
"While not acknowledged by the central bank yet, there is telltale evidence of inflation likely being much higher," said Mr Kunal Kundu, an economist with Societe Generale Global Solution Centre, adding that this can "further imperil consumer confidence".
Consumers are key to the country's economic recovery, with private consumption accounting for some 60 per cent of India's gross domestic product. To foster demand, the central bank will likely keep borrowing costs lower for longer.
That will leave the RBI struggling to deliver on its primary job of keeping inflation at the 4 per cent midpoint of its 2 per cent to 6 per cent target band, given that it is looking for support from the government in the form of fiscal measures.
Inflation may turn out to be a bigger risk for India than growth over the coming quarters, if not dealt with at this stage using various monetary policy tools, according to Deutsche Bank economist Kaushik Das.
He sees inflation staying near the RBI's upper tolerance limit if there are further shocks such as an erratic monsoon, which could disrupt farm output that accounts for a fifth of the US$2.7 trillion (S$3.7 trillion) economy.
Manufacturing companies' expenditure on raw materials increased 37 per cent in the three months to December from a year ago, accounting for more than 63 per cent of their total expenditure, an analysis from the central bank showed recently.
"We see our profitability come under stress," said Mr Shashank Srivastava, senior executive director for marketing and sales at Maruti Suzuki India, the nation's largest carmaker. "We are watching the situation and not ruling out further price hikes."