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Business Commentary/ Dilip Thakore

Corporate India becomes price-conscious, ahoy!

One of the untrumpeted gains of the economic liberalisation and deregulation programme which began in 1991 and which has been moving forward in fits and starts under several governments in New Delhi and the state capitals, is a quiet and long overdue revolution which is transforming the Indian marketplace. Corporate India has become price-conscious.

The most dramatic price war in post-Independence Indian history is now being waged in right earnest in the automobiles manufacturing industry. On December 30, hours before the formal unveiling of Telco's long-awaited small car Indica, Maruti Udyog Limited slashed the price of its base model small car by an unprecedented Rs 24,632 (11.75 per cent).

Telco, the indigenous truck manufacturing major, came up from behind to best the world-beating Japanese in the LCV (light commercial vehicle) market segment in the nineties. The Indo-Japanese MUL management is now scared stiff that history might repeat itself in the small-car market segment in which MUL enjoys an 80 per cent market share.

The price war between Telco and MUL has sent ripples through the small car industry with several car manufacturers including Premier Automobiles reducing the price tags on their small cars. Although some small car manufacturing companies might get hurt in the imminent marketing war, lower prices and greater choice for consumers apart, the societal gain of the escalating car war is the cost-cutting and greater production efficiency fever which has undoubtedly seized managers in the small car manufacturing industry.

In the medium term this is certain to improve asset and employee productivity in the automobile industry and inspire auto industry managers to begin seriously targeting overseas markets.

The phenomenon of intense price competitiveness in the marketplace which stimulates upstream shopfloor level efficiencies and productivity, is not restricted to the automobile industry. Retail prices of personal computers, television sets, wrist watches and even FMCGs (fast moving consumer goods) are either stuck at 1996 levels or rising at rates well below the annual rate of inflation.

With capacity licensing now a bizarre memory of licence-permit raj, Indian industry has discovered the virtues of mass production. But mass production requires mass consumption. Hence the long overdue price wars in the marketplace for the consumer's grace and favour in a halcyon period when for the first time in the past half century, the citizenry is experiencing the benefits of supply side oriented economic policies.

Regular readers of this column may recall that the importance of minimal pricing to stimulate demand has been repeatedly stressed herein. Indeed, I have often argued that the starting point of marketing strategy should be market research to determine the price that large number of consumers are ready to pay for a product or service.

Thereafter production and shopfloor managers need to be given a clear mandate to manufacture a product or design a service within the price parameters indicated by price-oriented market research. The new success formula is to work backwards from mass consumption price points.

In effect, this means that the era of cost-plus pricing and periodic price increases to offset rising production and marketing costs is over. Henceforth, corporate and enterprise managements will have to think long and hard before taking price hike decisions. Unless justified by discernible and well-advertised product or service value-addition, higher prices could lead to severe erosion of market share, under-utilised capacity and bankruptcy.

At long last, Indian industry (public sector monopolies excepted) has entered an era in which price increases are the last option. It's a consummation devoutly wished.

However it is important to bear in mind that the era of cost-plus pricing has ended in only a few pioneer sectors of the economy, mainly in the consumer durables and to a lesser extent in the FMCG manufacturing industries.

Within vast swathes of the economy, particularly within the government-dominated infrastructure industries (electricity generation and distribution, telecom and postal services, rail and air transportation services, banking, insurance etc) cost-plus pricing is the rule.

Likewise, the socially beneficial principles of the economies of scale are inoperative in the huge agriculture sector which supports two-thirds of the nation's population, because of the gross under-industrialisation of Indian agriculture.

An estimated 20 million tonnes of foodgrains and over 40 per cent of the horticulture produce (valued at Rs 230 billion) of the nation is wasted annually because of government policies which have prevented the growth of the large-scale, economically viable food processing companies. The consequence: poor prices for farmers and high prices for consumers.

Therefore, the new and unprecedented price sensitivity which has begun to permeate the boardrooms of Indian industry needs to spread into other sectors of the economy. The cost-plus pricing policies of monopoly public sector companies and utilities need to be made justiciable by independent regulatory authorities such as the Telecom Regulatory Authority of India and the proposed Insurance Regulatory Authority which should be empowered to investigate their operational efficiencies.

Simultaneously there is an urgent need to encourage the industrialisation of Indian agriculture and to remove licensing and other barriers to the entry of transnational and domestic food companies into the food processing industry.

In this connection, it is pertinent also to acknowledge that a major impediment to mass consumption is the punitive indirect taxes regime which drives most manufactures and processed foods beyond the reach of the great majority of citizens. Although it is incontrovertible that for government at the Central and state levels, excise and sales tax are major and indispensable sources of revenue, there is a strong and valid argument in favour of lower indirect taxes which may well boost government revenues by expanding effective demand.

Lower marginal rates of direct taxation have boosted direct tax collections through the Nineties. There is no reason to believe that lower indirect taxes won't have a similar beneficial impact upon the exchequer. One hopes that the worthies currently giving final shape to the Union Budget for 1999-2000 will exhibit the courage to apply the principles of the Laffer curve to indirect taxes as well.

In short, while at long last Indian industry has become price sensitive, this overdue awareness of the importance of product and service pricing within a society characterised by low purchasing power, needs to spread to the infrastructure and agriculture sectors. This is a prerequisite of the India Inc metamorphosing into an efficient producer of goods and services able to compete for clients and customers in the emerging global marketplace.

Dilip Thakore

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