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High-inflation worries

Kashmir Times. Dated: 7/20/2018 3:38:33 PM

The Wholesale Price Index (WPI) figures of the month of June require a closer scrutiny so for as macro-economics of Indian market is concerned

The latest data which shows a sharp surge in wholesale inflation in June this year to four and a half years high of 5.77 percent is a matter of serious concern for the policy makers of the country. It is a sad state of affairs that the WPI considered a measure of price gains is back in the national spot light after a long time. The factors responsible for such inflation are not far to seek under the present circumstance which paint a grim scenario of the economic activity in the country. It is a considered opinion that the WPI is no longer the primary focus of approach to target inflation by the Reserve Bank of India in comparison to monetory policy formulation having ceded that role of Consumer Price Index (CPI) - the gauge remains significant economically. In this direction the measure of wholesale price increase is a key factor in calculating the Index of Industrial Production and is also used as a deflator to calculate the Gross Domestic Product (GDP) at current prices. A detailed scrutiny of the WPI data for the month of June reveals several pressure points which require closer scrutiny of the macro economics. The surge in crude petroleum prices in the international market in turn affecting the retail sale prices in India have contributed in a big way to the inflationary pressure by adding significantly to a 214 basis points for the month of June in terms of month-on-month jump for primary articles including essential commodities. This factor alone contributed to double digit inflation so far as fuel and power are concerned. It is noteworthy that inflation in fuel and power group has quickened since February this year from 4.55 percent print to 16.18 percent in the month of June alone. It is also significant to note that prices of foodstuffs have tripled since May this year to the present day. This increase in retail prices of foodstuffs has registered almost a four-fold increase in the first quarter of the current financial year. It is also significant to note that the annual price escalation of potatoes alone has been more than double in the last two months. Similarly, the price escalation of onions, though it has cooled over the last one year due to high production, has not been within the controllable limits. It is unfortunate that the poor former continues to be at the receiving end so far as the Minimum Support Price for the agriculture produce in concerned. The high claims of the NDA-government to provide impetus to the income of formers continue to be hollow because they fail to reach the targeted farming fraternity.
Apart from the considered measures announced by the central government to address the concern of the farmers have failed to provide any succour to the farmers. This is mainly because of the reason that economic situation in the post demonstration of the high currency value notes in November 2016 and implementation of Good and Services Tax (GST) in July 2017 have not improved the rural and agricultural economy of the country. The farmers as well as rural workers continue to suffer because of the after effects of these too major steps of the central government. Other than these factors, manufactured products - the third key group-level constituent of the WPI with the largest weight of 64.2 percent are also signalling a worrying wider inflationary trend. This could feed through to consumer price gains, which touched a five-month high of 5 percent in June alone. The headline inflation in this group, spanning 564 items, ticked up for a third consecutive month in June to 4.17 percent. Manufacture of basic metals that includes a range of goods from alloy steel castings, stainless steel tubes to copper plates and aluminium sheets - products that find diverse applications across multiple end-use industries - posted headline inflation of almost 18 percent, an increase from the at least 15 percent reading in May. To be sure, the price gains have to be seen from the perspective of an unfavourable base effect - WPI inflation in June last year was less than one percent. But policymakers can ill afford to ease their vigil, especially given the government's decision to increase the Minimum Support Price for Kharif crops and uncertainty about the spatial impact of this year's monsoon rains on overall agricultural output. In the end, a sustained trend of high WPI inflation will not only add pressure on the RBI to raise interest rates, but could also potentially undermine the pace of GDP growth, which has been pegged higher by the government for the current financial year. These factors can have a negative impact on both the projections on GDP and controlling the inflation.