The slow, great squeeze: Costs are up and margins are down. It is time for companies to think afresh and innovate, as they wait for sustained demand and better times

We'll have to pass on the cost increase to our customers to sustain the quality of our serviceThe twist is, many companies have managed to retain a great deal of pricing strength in this period due to resilient demand. Take the paper industry, where raw material costs of both pulp and paper have gone up. "Demand was strong, so whatever increase we got was passed on to the customers," says B. Hariharan, Group Director (Finance), Avantha Group, which includes paper maker Ballarpur Industries and capital goods company Crompton Greaves. "Indian corporates have passed on cost increases fairly successfully in financial year 2010/11," says Manoj Thakur, CEO, Avendus PE Investment Advisors. "If you pass on price increases two to three times and still demand does not come off, it indicates that this is a demand-led inflation." Yet another factor that loads the cost equation is wages and salaries. Travel portal Yatra.com is a case in point. Being in the service industry and having surplus cash, Yatra Online CFO Alok Vaish's stress is restricted to salary hikes by 10 to 13 per cent. "Finding and retaining good talent at reasonable cost is a challenge that we all have to deal with and don't think we can get away from," says Vaish. The average increase across industries has been in the 12 to 18 per cent range. Most finance heads have made their peace with the salary costs, though, and are amenable to giving bigger hikes in specific instances to retain talent.