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LATEST NEWS UPDATES | Retail inflation might not fall much in kharif season -Sanjeeb Mukherjee & Indivjal Dhasmana

Retail inflation might not fall much in kharif season -Sanjeeb Mukherjee & Indivjal Dhasmana

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published Published on Aug 22, 2016   modified Modified on Aug 22, 2016
-Business Standard

Recent trends indicate any such moderation would not be across the board or without riders: Experts

New Delhi: Contrary to some perceptions, consumer price index (CPI)-based inflation might not ease sharply after kharif crops arrive in the markets.

On the other hand, wholesale price index (WPI)-based inflation could see a rise, due to an increase in prices of commodities and metals.


CPI inflation rose to 6.07 per cent in July, highest since the new data series was launched in December 2014. This was largely because food inflation jumped 0.56 percentage points in a month, to 8.35 per cent in July from 7.79 per cent in June. Food items have 45 per cent weight in the CPI.

WPI inflation also rose to a 23-month high, of 3.55 per cent in July from 1.62 per cent in June. This was also partly because food inflation shot up to 11.82 per cent in July after rising to 8.18 per cent the previous month. Food items have only about 14 per cent weight in the WPI, showing price pressures were in manufactured products, too.

Going forward, the general feeling is that CPI inflation would come down due to cooling of food prices as kharif crops arrive. However, there are riders to this perception.

Ashok Gulati, former chairman of the Commission for Agricultural Costs and Prices, says cereals and pulses inflation would moderate in the coming weeks but mainly those sown during kharif. This does not include chana dal (Bengal gram), one of the most consumed pulses and grown on vast tracts. Chana is grown during the rabi season and a bumper kharif harvest won’t pull down its prices, though there might be some impact if competing legumes become much cheaper.

Gulati, now professor for agriculture in think-tank ICRIER, says he’s optimistic that in pulses, the retail prices of tur (pigeon pea), moong (green gram) and urad (black gram) in the retail markets would fall by 20-30 per cent; however, it is unlikely they’d go below Rs 120 a kg by Diwali. The current retail prices are much higher.

Along with chana, sugar prices are also not expected to moderate by much; production was less due to the impact of drought. World sugar prices are also on the higher side. According to a World Bank report, these moved up by 13 per cent between May and July. In the domestic market, sugar in the wholesale markets is almost 40 per cent costlier than during the same period last year.

Retail wheat prices also show a rising trend. Gulati said cotton prices were not expected to come down by much, as there had been a shift in sowing area towards pulses.

And, global markets showed some sign of picking up, which would improve export prospects.

Though the CPI rise will moderate, it will be highly impacted by money supply, farm wages and also global prices. “To me, the prices would settle around 2013-14 levels,” he said.

Average CPI inflation was at an elevated  9.49 per cent in 2013-14, though lower than the 10.18 per cent the previous year. In 2014-15, average CPI inflation declined to 5.97 per cent. However, it should be noted that while inflation numbers in 2013-14 and 2012-13 were based on the old series, with 2010 as the base year, those of 2014-15 were on the new series, with the base year of 2012. And, hence, not strictly comparable in statistical terms.

Gulati said what most people were discounting was the impact of the 7th pay commission on food prices. “After all, how are prices determined? It is the impact of production of goods and supply of money and if money supply increases faster, prices rise,” he said.

Adding: “I don’t see a big drop in overall CPI, but, yes, there might be some correction because of pulses and vegetable prices. In fact, these might not go down big time, too, as the impact of floods in eastern India needs to be factored.”

More, whatever moderation is expected in CPI would be negated by increased money supply, due to pay commission wages. The higher salaries of central government staff would be reflected from August salaries onwards. The government exchequer would be hit by at least Rs 80,000 crore this financial year, even if increased allowances are not paid.

S Mahendra Dev, director of the Indira Gandhi Institute of Development Research, Mumbai, said food inflation would moderate in the coming months due to bumper kharif sowing, particularly in pulses, whose area has gone up by 30 per cent. In vegetables, too, there can be some moderation.

However, prices of commodities whose area was taken by pulses during the kharif season might not see their prices coming down, like cotton and guar. “I expect CPI to moderate in November-December,” he said.

In the new era of inflation targeting, the proposed monetary policy committee will have to rein in CPI inflation at two to six per cent. If not done for three consecutive quarters starting this month to March 2021, the Reserve Bank will have to say why.

However, said Mahendra Dev, there might not be much of an impact on WPI inflation, where the weight of food is less. “Also, in commodities which have higher weight, global prices are showing a rising trend,” he said.

ICRA chief economist Aditi Nayar said headline WPI inflation was likely to rise to as much as 4.5 per cent in the coming months, as higher prices of imported commodities and those of domestic inputs, such as cotton, push up core inflation (manufactured items sans processed food).   

CARE Ratings’ chief economist Madan Sabnavis said WPI inflation was likely to rise due to less weight of food items in the index and hardening of prices of other commodities, and a low base effect.

World Bank data showed that in metals, global copper prices moved up from $4,695 a tonne in May to $4,865 in July, while aluminium rates rose five per cent in the same period.

Nickel, tin and zinc has become costlier by 18.5 per cent, seven per cent and 17 per cent between May and July, respectively, a trend which might be maintained.

Business Standard, 22 August, 2016, http://www.business-standard.com/article/economy-policy/retail-inflation-might-not-fall-much-in-kharif-season-116082100785_1.html


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