WITH PRICES of crude oil and other commodities rising due to disruptions in global supply chains in the wake of the Russia-Ukraine war, the Wholesale Price Index or WPI-based inflation surged to 14.55 per cent in March 2022, after a 13.11 per cent reading in February 2022.
This is the second highest WPI print in the 2011-12 series. The annual WPI inflation — inflation at the producer level — has remained in the double—digits in every month of 2021-22 and has almost consistently edged upwards.
For policymakers, a more worrying prospect is that of the Consumer Price Index or CPI-based annual inflation – inflation at the retail level – converging towards the WPI-based inflation, in deviation from the usual trend of the wholesale price inflation collapsing in the direction of the retail price rise.
It presents a peculiar challenge for policymakers: the gap between the two metrics continuing for an extended period points to lingering market inefficiencies, triggered, in part, by the Covid-induced impact at the producer level. Secondly, the rise in CPI inflation, with no cooling off in sight, indicates a shift from the historical trend where the wholesale inflation typically collapses towards consumer inflation.
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Ahead of the wholesale price-based inflation spiking to a four-month high of 14.55 per cent in March, a high base of 7.89 per cent in March 2021 notwithstanding, data released last week showed retail inflation in March had surged to a 17-month high of 6.95 per cent, driven primarily by high prices of fuels and food items such as cereals, vegetables, milk, oils, meat, and fish.
Economists are worried. “You are in a situation where the pricing power has increased in the hands of the producers. So, what will happen is that cost push increases showing up in the WPI will influence the financial crisis. In the past, because we had this very large MSME sector, it was the other way around,” Pronab Sen, former Chief Statistician of India, said. “Given that the MSMEs have been decimated, the pricing power today has shifted. The kind of patterns one talks about the WPI convergence to the CPI may not work; it may in fact be the CPI convergence to the WPI,” Sen said.
The gross non-performing assets (NPAs) of MSMEs, or loans defaulted by these enterprises, rose by Rs 20,000 crore to Rs 1,65,732 crore as of September 2021 from Rs 1,45,673 crore in September 2020. The Covid-19 impact on MSMEs has played out in two ways: One, in the FMCG space, the wiping out of many small firms handed increased pricing power to larger manufacturers, and this resulted in price increases despite falling product volumes. The December quarter earnings of FMCG companies pointed to this trend in rural markets first: marginal or better-than-urban sales growth was visible in value terms, but amid falling demand as was evident in thinning volumes.
Why the spike, worry
THE small and medium sector bore the brunt of the pandemic. The pricing power has shifted substantially to larger enterprises. The cost push increases showing up in the WPI will likely influence the financial crisis, a worry going forward.
Two, in industrial sectors such as automobiles that were already facing increased commodity prices, reduction in the number of MSME suppliers handed the ability of commanding higher prices to the remaining component makers, translating into rising input costs for original equipment manufacturers. India’s largest carmaker Maruti Suzuki India Ltd raised the prices of its products four times in 2021-22 – compared to just one or two price hikes every year. Monday, it announced another price hike, the first in 2022-23, across models. Other carmakers too have hiked prices multiple times.
Sen also alluded to the fact that the growing GST collections were an indicator of growth in the segment of the economy that collects the tax. “It’s part of the same story. Basically, what the GST collections are telling you is that the component of the economy that we’re paying GST to has grown,” he said.
The minutes of the RBI’s Monetary Policy Committee meeting held during December 2-4, 2020, had noted the anecdotal evidence of rising profits and profit margins, improving capacity utilisation and lack of new capacity additions creating ripe conditions for the oligopolistic core to start exercising pricing power. “Anecdotal evidence suggests that in several sectors which are characterised by an oligopolistic core and a competitive periphery, the oligopolistic core has weathered the pandemic well and it is the competitive periphery that has been debilitated… These are also the enterprises that are benefiting from borrowing at rates below the policy corridor through commercial paper issuance,” Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad had said then in the MPC meeting.
Between the wholesale price and the retail price, the difference essentially is that the former tracks only basic prices devoid of transportation cost, taxes and the retail margin, etc. And that WPI pertains to only goods, not services. So, the WPI basically captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator (the ratio of the value of goods an economy produces in a particular year at current prices to that of prices that prevailed during the base year). Despite this, the WPI-inflation far exceeding the CPI-inflation serves as a signal for retail prices to rise further going forward. Officials at the Reserve Bank of India had pointed to evidence that suggested WPI-inflation collapsing towards the CPI-inflation rather than the other way around. Relying on this, they had indicated that wholesale inflation would tend to ease and converge into CPI inflation with passage of time.
“Till some time, the producers will absorb it but when it starts hitting their bottom line, then they will start passing on. If prices continue to rise at retail level, it may start hitting demand going ahead,” Devendra Pant, Chief Economist, India Ratings said. It is not necessary that WPI will increase first and then CPI or vice versa; it may happen simultaneously. “WPI is rising due to higher prices of inputs and raw materials. Higher final prices in some way may influence prices at the first producer level,” he said.
Going ahead, retail inflation may not cool down, prompting the RBI to introduce more liquidity curbing measures. “The month-on-month decline in the food and beverages index in March 2022, was predominantly led by vegetables, eggs and tea, whereas many other items saw moderate increases. We remain concerned that even a normal monsoon may not be enough to douse the retail prices of those items that are pushing up food inflation, such as edible oils,” Aditi Nayar, Chief Economist at ratings agency ICRA said.
ICRA expects WPI inflation to remain in the range of 13.5-15 per cent in April, partly depending on where crude oil prices settle in the remainder of the month and how much petrol and diesel prices are revised further. “The broad-based nature of the rise in the WPI inflation is likely to be of particular concern to the MPC. We see a growing probability of the first repo hike being preponed to June 2022,” Nayar said.
Inflation on the inputs side is being passed on by manufacturers to the output prices. “As the margins of the manufacturers have been under pressure due to rising input costs, transportation, and logistics, they are passing on these into their output prices leading to higher inflation in manufactured products. The higher input costs, especially of raw materials, have aggravated due to the Russia-Ukraine conflict. As the conflict does not seem to be coming to an end soon, the headwinds arising out of the disruption in the global supply chain coupled with uncertainty will continue to put pressure on domestic wholesale inflation,” Sunil Kumar Sinha, Principal Economist, India Ratings and Research, said.
In its ‘State of the Economy’ report released Monday, the RBI cautioned on the ‘grim’ near-term global outlook, and said that the surge in commodity prices is already posing inflation risks, especially through the conduit of surging imports. “Emerging market economies are bracing up to contend with swift shifts in risk sentiments and tightening of global financial conditions that could produce real economic consequences which may thwart incipient recoveries or even precipitate rocketing inflation and economic downturns,” the RBI noted. “The Indian economy is not immune to these negative externalities,” it said.
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