November 26th, 2007 
Deepak WHERE ARE PRICES HEADED? Over the last decade, many products and services have seen a significant fall in prices. This trend has obviously made these products and services affordable to a larger number of people, resulting in massive increase in consumption. From interest rates on home loans, to computers, electronic appliances and air travel, Indian consumers now have access to things they could only dream of a couple of decades ago. Simple economics is at work here. The price of a commodity drops when either demand decreases or supply increases. Clearly, decreasing demand is not a contributor. Expanding supply has been the main driver of falling prices. In most cases, this has happened because new capacity has entered the market. For many products, this capacity increase is both because new factories have been built in India and because previously banned imports are now freely permitted. This is not just a matter of increasing numbers, however. As volumes increase, the cost of production itself declines. Processes become more efficient and inputs can be sourced more economically Competitive pressure contributes to a persistent drive amongst all producers to cut costs and prices, through the use of innovation on both processes and products. All of this ultimately leads to the widening of affordability that we have seen over the last decade. In short, the process will continue as long as this virtuous circle of expanding capacity, increasing imports, rising competitive intensity and increasing productivity continues. This is true of most products. Take the explosion in retail as an example. Even if the product being sold remains the same, organised retail represents a way of getting it to the consumer at lower cost. However, unrestricted increases in volumes are not possible in some critical areas. If trade across borders cannot take place, one major source of competitive pressure is lost. If availability is fixed by nature or constrained by regulatory impediments, the process described above will not work. In these instances of ever-increasing demand and constrained supply, prices will rise persistently. The most prominent example of this is land, the availability of which is truly fixed by nature (with the few exceptions of reclamation, such as in Mumbai or Dubai). Land prices will continue to increase; the pattern itself will be distorted by the differential quality of infrastructure available in different pockets. Investments in infrastructure will help in smoothening out these differences, but cannot [...]
Posted in 
