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Negative WPI inflation is indicative of slack economic activity. RBI must take note.

By: Express News Service |
April 18, 2015 12:32:54 am

Not many seriously track the wholesale price index (WPI) numbers these days. The main reason, of course, is that the RBI, ever since the submission of the Urjit Patel committee report in January 2014, has made consumer price index (CPI) inflation the nominal anchor for the conduct of its monetary policy. The central bank’s logic here derives from the fact that people’s inflation expectations are reflected not in the WPI, but the CPI. Since a primary goal of monetary policy is to anchor inflation expectations — so that they don’t foment wage-price spirals — the RBI’s focus is on targeting retail-level inflation. It also does not help that the WPI is a hotchpotch of all commodities, from rice and tomatoes to hydrogen peroxide and ferromanganese, whose prices may not really contribute to the formation of the aam aadmi’s inflation expectations.

But nobody, the RBI included, can afford to ignore WPI inflation when it has plunged to an all-time low of minus 2.33 per cent in March and has been in negative territory for five consecutive months. This, even as CPI inflation for March was 5.17 per cent. The negative WPI inflation is not solely due to fuel (mineral oils) prices falling 18.1 per cent year-on-year. Even core WPI inflation — which strips out volatile fuel and food prices — was minus 0.36 per cent in March. What this indicates is deflationary pressures and loss of pricing power at the producer’s end. The fact that even WPI food inflation is ruling at a not-so-high 6.31 per cent (6.2 per cent based on CPI), despite a poor kharif and rabi crop and the damage from recent unseasonal rains, shows the absence of any real upward price pressures from the ground.

Bearish global markets in agri-commodities, unlike even a year ago, have helped keep a lid on sticky food inflation as well.

Negative WPI inflation, indicative of slack economic activity, is also reinforced by evidence of deceleration in employment generation.

Labour Bureau data, based on a survey of eight major employment-intensive sectors and reported by this paper, shows only 1.17 lakh new jobs were created during October-December, as against 1.58 lakh and 1.82 lakh in the preceding two quarters. If firms are hiring less because of low demand and poor pricing power, it makes WPI numbers impossible to ignore. A scenario where companies have to borrow at 10 per cent or more, even while facing declining price realisations on their products, is simply not sustainable. The economy desperately needs lower interest rates now.

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