In India, the wholesale price index (WPI) is the main measure of inflation. The WPI measures the price of a representative basket of wholesale goods classified into three categories, namely, Primary Articles (Weight 22.62%), Fuel & Power (Weight 13.15%) and Manufactured Products (Weight 64.23%). According to the data released by the Ministry of Commerce and Industry the WPI increased by 3.1 percent in the month of January 2020 on year-on-year basis as compared to 2.76 percent in the month of January 2019. However, the build-up inflation rate in the current financial year till the month of January is 2.50% compared to a build-up rate of 2.49% in the corresponding period of the previous year. The good thing is that the prices increased by a meagre 0.08% over the last month.
Wholesale Prices fall marginally in Primary Articles
The index for Primary Articles declined by 1.1 percent to 147.2 from 148.8 for the previous month. On a positive note, the onion prices have now started receding this month as they registered a fall of 35.8% compared to December 2019. However, they have increased by 293% on year to year basis and by 333.80% since March 2019. Although onions have a meagre weight of 0.16 percent in the WPI Index yet the magnitude of increase of its wholesale prices was too high and so it has given its impact on the overall index on year-to year basis. Similar was the trend in the vegetable prices which decreased by 10.06% in the month of January but increased by 52.72% on year to year basis and by 53.25% since March 2019.
But then there are potatoes where the prices increased by 9.71% compared to the last month and the build- up rate is till the month of January is 98.51% compared to a build-up rate of 8.35% in the corresponding period of the previous year which is a matter of continued concern.
The wholesale prices of food articles, having a weight of 15.26% in the WPI, have decreased by 1.05% over the last month but the build-up up to January 2020 this fiscal is 11.28% and so there is going to be pressure on the year-end Index on account of these items unless the prices drop sharply in the next two months. Further, if we take the year-on-year figure, the prices of food products have increased by 11.51% compared to 2.41% last year.
Prices of Fuel Increased reasonably
The prices of fuel and power have actually increased by 3.42% on year to year basis. However, the prices only increased mildly by 1.38% over the last month.
While the prices of Petrol and High Speed Diesel increased by 8.03% and 4.93% respectively, the prices of LPG increased by 1.78% on year-to-year basis. The price spiral has slowed down over the last month as they increased by 0.11%, 1.81%, 0.42% and 2.51% respectively.
Mild increase in Prices of Manufacturing Goods
The wholesale prices of the manufactured articles in January 2020 increased by 0.42% over the last month. However, the cumulative increase in prices from March 2019 is a minimal 0.17% and so we may say that the prices of manufactured goods have remained stable during the year.
On one hand, the prices have increased in the case of Manufacture of Vegetables and Animal Oils (4.96%), Semi-finished Steel (2.56%), Basic Metals (2.22%) and Manufactured Food Items (3.55%) etc. over the last month. But on the other hand the prices of certain other manufactured goods such as Wearing Apparel, Leather and Textiles declined by 0.79%, 0.50% and 0.43% respectively.
Hence we see that in case of manufactured food items, the rise in the wholesale prices is the highest signifying that increase in primary food items prices do have their trickle-down effect on the prices of the manufactured food articles as well and therefore it is important to keep the food prices under check through better supply management in the remaining quarter of the year.
Rise in wholesale prices has severe implications for the economy
Increase in the wholesale prices usually affects the retail prices and directly impacts the final consumers. The increase in prices of food articles, vegetables and fuel etc. raises cost of living for consumers, thus leaving them with lesser amount for buying the manufactured items and even for savings.
For the manufacturers, it is but a double whammy as while on one hand the margins reduce due to higher cost of primary inputs and fuels, the demand for their final products falls on the other, which, in turn, could hit their stock prices hard.
The Reserve Bank of India, for whom keeping inflation under the targeted bands is a priority, may resort to increase in Interest rates and that may reduce the credit growth rate in the economy. This may lead to less consumption demand and increase the cost of credit for the manufacturers. According to a recent release of data by the RBI, outstanding credit position end-December has come down to 7.1 percent, which almost has halved as compared to 2018, when it was 14 per cent.
However, according to a more recent statement released by Ministry of Finance, Government of India, Standard & Poor, the leading rating agency in the world has reportedly reaffirmed the sovereign rating of BBB minus with a stable outlook for India. Apparently the growth story of Indian economy still holds value for the medium and long- term. It is largely believed that the current slow-down could as well be a cyclical phase and a recovery may bring the sheen back to the economy.
The government seems to be responding to the challenges posed by the economic environment and the structural reforms process is being strengthened further to enthuse both confidence and liquidity into the system. Efforts have also been made to improve the supply management wherever possible.
Although the increase on WPI on cumulative basis this fiscal is definitely worrisome, yet the last month trends are quite encouraging and if the prices continue to decrease in the primary articles and fuels, there may be some respite in WPI at the year end. At the same time it is very important to ensure that credit offtake improves in the economy so that the demand for the manufactured goods increases.
As the present slow-down is largely cyclical in nature, structural reforms must continue to boost ease of doing business and make in India sort of initiatives of the government. When more jobs are created, the demand would increase and when volumes increase, the margins of the producers would also increase. As far as the prices of the Primary Goods are concerned, it is imperative that the prices be kept under check through better supply management and enhanced coordination between concerned agencies in order to contain further escalation in the Wholesale Price Index.