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Friday, December 06, 2019

The retail paradox: Wholesale food inflation is up, but consumers aren’t feeling the pinch yet

According to official data, annual inflation in the wholesale price index (WPI) for food articles has gone up from minus 0.21% to 6.98% between September 2018 and May 2019.

Written by Harish Damodaran | New Delhi | Updated: June 20, 2019 5:13:23 am
The retail paradox: Wholesale food inflation is up, but consumers aren’t feeling the pinch yet Retail food inflation at well below 2% has given the Reserve Bank of India enough room to cut policy interest rates thrice this year. (File)

In a departure from the usual pattern, food prices in India are rising at a much faster rate at the wholesale level than retail end.

According to official data, annual inflation in the wholesale price index (WPI) for food articles has gone up from minus 0.21% to 6.98% between September 2018 and May 2019. The same period has seen inflation in the consumer food price index (CPFI) increase from 0.51% to just 1.83%.

Chart 1 (Below), which plots the year-on-year movement in the two indices since January 2018, shows retail food inflation ruling higher than the corresponding wholesale rate till November 2018. That trend — seemingly natural for a country with distribution inefficiencies and too many intermediaries between farm and fork — has, however, reversed over the last six months. In May, CPFI inflation was 5.15 percentage points more than WPI food inflation.

Source: Office of the Economic Adviser and Central Statistics Office

The return of inflation at the wholesale end is apparent even in non-food farm articles that include fibres (cotton, jute, etc), oilseeds, fodder, tobacco, rubber and hides. Between January and May this year, the increase in WPI inflation for these items — many of them inputs for production of milk, chicken and other livestock products — has been from 2.32% to 6.23%, which is more or less that for food articles (see Chart 2).

Source: Office of the Economic Adviser and Central Statistics Office

 

The question to ask is: Why is this wholesale inflation not being reflected at the retail end? Retail food inflation at well below 2% has given the Reserve Bank of India enough room to cut policy interest rates thrice this year; that flexibility would have been far less at 6-7 per cent.

One reason for the lower CFPI inflation can be better “channel efficiency” or compression of the value chain between the farmgate and retail prices. But such dramatic reductions in markups — what the trade adds to its costs — or number of middlemen between producers and consumers are unlikely, at least in the short run.

A more plausible explanation could be supply-side pressures building up due to a combination of drought and sustained low produce prices. The effects of these, leading to reduced plantings and investment in inputs by farmers, are initially felt in crop arrivals at wholesale markets or primary point of sale. The resultant wholesale inflation would ultimately get transmitted to the final consumer, but with a lag. The trade, which includes organised players, may not find it easy to pass on costs immediately, especially in an uncertain demand environment such as that prevailing today. It would rather reconcile to a squeeze in margins, albeit temporary.

The best example here is of milk, where farmers did not, for much of the period from mid-2014 to end-2018, receive good rates. Many of them responded over time by underfeeding their animals or rationalising herd sizes. That was bound to affect supply at some point, with the water and fodder shortages from prolonged dry weather — since last September in most parts — only aggravating matters.

Dairy cooperatives in Gujarat have, in the last one year, reported huge increases in the cost of cattlefeed ingredients. Between May 2018 and May 2019, their average purchase price of maize has shot up from Rs 14,000 to Rs 21,600 per tonne, while similarly soaring from Rs 9,050 to Rs 16,700 for de-oiled rice bran, from Rs 15,100 to Rs 22,000 for fine rice polish, from Rs 4,700 to Rs 7,100 for molasses, from Rs 11,500 to Rs 21,400 for corn gluten feed, and from Rs 19,400 to Rs 29,100 for cottonseed extractions.

Since December-January, Gujarat’s dairy unions have, in order to compensate farmers for higher feed and fodder costs, also hiked their procurement price of milk by roughly Rs 70 per kg of fat. This increase translates into just over Rs 4.30 for a litre of full-cream milk with 6% fat content, whereas Amul, Mother Dairy and other brands have revised their retail prices up by only Rs 2/litre.

If the monsoon does not pick up — rainfall has been 43% below normal so far this month — it won’t be too long before consumers, too, begin to feel the pinch from food inflation.

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