Inflation rattles corporates in India, China

Corporations in China and India have been riding on strong domestic economies, much to the envy of the West, but they now worry that runaway inflation could hit growth.

Davos: Corporations in China and India have been riding on strong domestic economies, much to the envy of the West, but they now worry that runaway inflation could hit growth.

Inflation and growing asset bubbles top most companies' concerns in Asia's largest and third-biggest economies, according to executives and experts at the World Economic Forum (WEF) annual meeting opening Wednesday in this Swiss ski resort.

Davos organisers claim a record turnout this year from the key BRIC emerging markets. Economists are counting on them to provide most of global growth this year.

But corporations in these markets are fretting about rising protectionism, stronger currencies and increasing labour costs.

"In our business, raw materials make up the bulk of the costs. Oil prices are high and natural rubber is skyrocketing -- it's like buying gold," Onkar Kanwar, chairman and managing director of Indian tyremaker Apollo Tyres, told Reuters at the Davos meeting.

Rising prices of commodities ranging from sugar to steel are already forcing some foreign and domestic businesses operating in China and India to pass on the cost to consumers.

Over the past few months, McDonald's Corp and Starbucks raised the prices of burgers, fries and coffee in China, while JSW Steel Ltd, India's No. 3 producer, lifted product prices by 4-5 percent.

"Our bottom lines are getting affected because margins are under pressure," Apollo's Kanwar said, adding that the company now operates at margins of 10-12 percent, down from 20 percent a year ago.

China and India both face increasing public dissent due to

inflationary pressures, especially in housing and food, with some companies concerned that governments are not doing enough.

India's food inflation stood at 15.5 percent in December, the highest of any major economy in Asia and China is not far off at 9 percent.

"When you see the type of growth rates that these markets are experiencing, the whole area of inflation is one that really does need to be watched carefully," Denis Nally, chairman of PricewaterhouseCoopers, told Reuters at the Davos Forum.

"It's one of the reasons that the number one threat to this recovery that CEOs are talking about is overall economic instability," Nally added.

In China, even though inflation eased in December to 4.6 percent, lower than its highest in 28 months in November, prices remain elevated and some analysts have questioned the credibility of official statistics.

Particularly worrying are China's property prices. Housing prices in major cities soared by more than a fifth last year, private research showed in January, raising doubts about the effectiveness of tightening measures announced during 2010.

Chinese bloggers, frustrated with rising prices, have been drawing analogies between China's inflation and the speed of gold medallist hurdler Liu Xiang.

"We can't beat Liu Xiang and we can't beat inflation," a blogger wrote in a post.

In India, food inflation, which has been in double digits for most of last year, is such a pressing issue that it could sway the outcome of elections.

In 1998, Bharatiya Janata Party (BJP) lost state elections in Delhi after the price of onions -- a key ingredient in Indian cuisine such as curry and chapati -- increased several fold.

"Public discontent is emerging in Asia's largest emerging economies, India and China, threatening to derail the region's growth prospects," Matt Robinson, senior economist at Moody's Analytics, said in a report.

China and India have been raising interest rates, though both are wary of doing it too quickly to avoid crimping strong economic growth and attracting hot money inflows which could disrupt their markets.

"Inflation is a huge concern, but we won't want the economy to slow down either," said Niraj Bajaj, chairman and managing director of Indian steelmaker Mukand Ltd.

Bureau Report