Growing concern as wholesale price inflation hits 14.55%, pressure on retail prices

With rising prices for crude oil and other commodities due to disruptions in global supply chains following the Russian-Ukrainian war, the Wholesale Price Index or WPI-based inflation has jumped to 14.55% in March 2022, after reading 13.11%. in February 2022.

This is the second highest WPI impression of the 2011-12 series. Annual WPI inflation – producer-level inflation – has remained in double digits every month of 2021-22 and has been rising almost constantly.

For policymakers, a more worrisome prospect is that of the consumer price index or annual inflation based on the CPI – inflation at the retail level – converging towards inflation based on the WPI, in deviation from the usual trend of wholesale price inflation collapsing in the direction of rising retail prices.

This presents a particular challenge for policymakers: the gap between the two measures that continues for an extended period indicates persistent market inefficiencies, triggered, in part, by the Covid-induced impact at the producer level. Second, the rise in CPI inflation, with no slowdown in sight, indicates a change from the historical trend where wholesale inflation generally plummets towards consumer inflation.

Before wholesale price-based inflation hit a four-month high of 14.55% in March, despite a high base of 7.89% in March 2021, data released last week showed that the retail inflation in March had reached a 17-month high of 6.95%, mainly due to high prices for fuels and food products such as cereals, vegetables, milk, oils, meat and fish.

Economists are worried. “You are in a situation where pricing power has increased in the hands of producers. So what will happen is that the cost increases appearing 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,” said Pronab Sen, India’s former chief statistician. “As MSMEs have been decimated, the pricing power has changed today. The kind of patterns that are talked about about the convergence of WPI to CPI may not work; they may in fact s take action from the convergence of the CPI to the WPI,” Sen said.

Gross Non-Performing Assets (NPAs) of MSMEs, or defaulted loans of these firms, increased by Rs 20,000 crore to Rs 1,65,732 crore in September 2021 from Rs 1,45,673 crore in September 2020. The impact of Covid-19 on MSMEs played out in two ways: firstly, in the FMCG space, the shedding of many smaller companies gave increased pricing power to large manufacturers, leading to price increases despite lower product volumes. The December quarter results of consumer packaged goods companies first highlighted this trend in rural markets: Marginal or better sales growth than in urban areas was visible in value terms, but against a backdrop decline in demand, as evidenced by lower volumes.

Explain

Why the spike, don’t worry

THE small and medium-sized business sector has borne the brunt of the pandemic. Pricing power has shifted significantly to large corporations. The cost push that appears in the WPI will likely influence the financial crisis, a concern in the future.

Second, in industrial sectors such as automotive that were already facing rising raw material prices, the reduction in the number of MSME suppliers allowed higher prices to be imposed on the remaining component manufacturers, which s translates into higher input costs for original equipment manufacturers. India’s biggest automaker, Maruti Suzuki India Ltd, raised prices for its products four times in 2021-22, compared to only one or two price increases each year. On Monday, it announced another price hike, the first in 2022-23, on all models. Other automakers have also repeatedly raised their prices.

Sen also alluded to growing GST collections being an indicator of growth in the segment of the economy that collects the tax. “It’s part of the same story. Basically, what GST perceptions tell you is that the component of the economy that we pay GST to has increased,” he said.

The minutes of the RBI Monetary Policy Committee meeting held from December 2-4, 2020 had noted anecdotal evidence of increased profits and profit margins, improved capacity utilization and lack of new capacity additions creating favorable conditions for the oligopolistic core to start exercising prices. Power. “Anecdotal evidence suggests that in several industries characterized 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 weakened… It is also businesses that benefit from borrowing at rates below the political corridor through the issuance of commercial paper,” Jayanth R. Varma, a professor at the Indian Institute of Management, Ahmedabad, said at the MPC meeting at the time.

Between the wholesale price and the retail price, the difference is basically that the former only follows the basic prices without freight cost, taxes and retail markup, etc. And that WPI is only about goods, not services. Thus, the WPI essentially captures the average movement of wholesale prices of goods and is used primarily as a deflator of GDP (the ratio of the value of goods an economy produces in a given year at current prices to that of prices that prevailed during the reference year). Despite this, WPI inflation far exceeding CPI inflation serves as a signal for retail prices to rise further in the future. Reserve Bank of India officials had pointed to evidence suggesting that WPI inflation is collapsing towards CPI inflation rather than the other way around. Based on this, they had indicated that wholesale inflation would tend to subside and converge to CPI inflation over time.

“Until a while producers will absorb it, but when it starts to affect their bottom line they will start to pass. If prices continue to rise at the retail level, this could start to hit demand in the future,” said Devendra Pant, Chief Economist, India Ratings. It is not necessary for the WPI to rise first and then the CPI or vice versa; it can happen simultaneously. “The WPI is rising due to higher input and raw material prices. Higher end prices can somehow influence prices at the first producer level,” he said.

Going forward, retail price inflation may not subside, prompting the RBI to introduce more liquidity-reducing measures. “The month-over-month decline in the food and beverage index in March 2022 was mainly led by vegetables, eggs and tea, while many other items saw moderate increases. We remain concerned that even a normal monsoon may not be enough to extinguish the retail prices of items that drive up food inflation, such as edible oils,” said Aditi Nayar, chief economist at the agency. ICRA rating.

CIFAR expects WPI inflation to remain in the 13.5-15% range in April, depending in part on where crude oil prices stabilize in the rest of the month and how the amount of gasoline and diesel prices that will be revised further. “The widespread nature of the WPI inflation hike is likely to be of particular concern for the MPC. We see a growing likelihood that the first repo hike will be delayed until June 2022,” Nayar said.

Inflation on the input side is passed on by manufacturers to output prices. “As manufacturers’ margins have been under pressure due to rising input, transportation and logistics costs, they are passing these on to their output prices, leading to higher inflation for manufactured goods. The higher costs high inputs, especially raw materials, have worsened due to the Russian-Ukrainian conflict.As the conflict does not appear to be over, the headwinds resulting from the disruption of the global supply chain, associated to uncertainty, will continue to put pressure on domestic wholesale market inflation,” Sunil Kumar Sinha, Senior Economist, India Ratings and Research, said.

In its report on the state of the economy released on Monday, the RBI warned of a “gloomy” short-term global outlook and said soaring commodity prices already pose inflation risks, in particularly through the surge in imports. “Emerging market economies are bracing for rapid shifts in risk sentiment and tightening global financial conditions that could produce real economic consequences that could thwart nascent recoveries or even precipitate a spike in inflation. and economic downturns,” the RBI noted. “The Indian economy is not immune to these negative externalities,” he said.

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