Wholesale and Retail Inflation Rise Steeply, Industry Output Grows

• Posted By Amritesh
• On August 18th, 2016
• Comments: no responses

 

WHOLESALE PRICE INDEX (WPI)

 

Wholesale Price Index (WPI) for the month of July, 2016 rose steadily to 3.55% as compared to 1.62% in the previous month. Inflation is on the rise for past four months and it is the highest recorded in last 23 months. The rise is mainly attributed to steep rise in the food prices and manufactured products. However, the softer crude prices has shielded against steeper rise in inflation rates. The food inflation rose steeply to 11.82% as compared to 8.18% in the previous month, the highest in 31 months. The rise in prices of potato was significant in the previous month leading to price rise. In fuel and power segment, inflation contracted by (-)1.0% as compared to (-)3.62% in the previous month. Wholesale Inflation takes into account the prices paid by the manufacturers on the goods imported and used as inputs. The main reason behind the WPI witnessing spurt is largely due to rise in prices of Food and Primary Articles. However, any further rise in Food Inflation may become a cause of concern keeping in mind the projected inflationary targets. The rise in food prices despite decent monsoon is a worrying factor as the inflation is expected to continue with the upward trend in the coming month as well. On month to month basis Primary articles rose by 9.40% as compared to 5.50% in the previous month while Manufactured products rose to 1.83% from 1.17%. The index provides Primary Articles with 20.11% weightage, 64.97% for manufactured products and power & fuel with 14.91%.

 

Wholesale Price Inflation for the month of May,’16 has been revised to 1.24% from 0.79%.

 

CONSUMER PRICE INDEX (CPI)

 

Consumer Price Index (CPI) rose to a near 2 year high in the month of July, ‘16 as it stood at 6.07% as compared to 5.77% in the previous month. Retail Inflation has been on the rise for quite sometime now. Spurt in food prices is the prime reason behind rise. As Food Inflation rose to 8.35% from 7.79% recorded in the previous month. Spike in prices of Pulses, Vegetables and Sugar were largely responsible for the rise. Consumer Food Inflation has 47% weightage in CPI Index. The uptrend is expected to continue in the coming month as no major change is expected as of now.

With Inflation on the rise, RBI will not be encouraged to lower the lending rates immediately. Industrial Output is also pretty choppy as of now.

CPI is on the rise, which is attributed to higher weightage being given to retail inflation, reflects the true impact of inflation on Common People. Going forward, stability in CPI will lead to strengthening of the economy and would call for changes in the monetary policy.

 

INDEX OF INDUSTRIAL PRODUCTION (IIP)

 

Index of Industrial Production (IIP) grew by 2.1% in the month of June,’16 as compared to rise of 1.2% witnessed in May,2016. IIP figures have been fluctuating for quite some time now as it has failed to gain any momentum.

The rise is mainly contributed to growth in Manufacturing, Mining and Electricity Sector. As manufacturing sector grew by 0.9%, whereas Mining sector grew by 4.7%, while the Electricity Sector grew by 8.3%. The Capital Goods fell steeply for the eight month in a row by (-)16.5% while Consumer Durables Sector fell by 5.6 %.  

The growth of factory output is essential for the economy. Industrial growth is mandatory for creation of jobs, however the turbulent European market and China slowing down is a cause of concern and one needs to be cautious going forward.

As I had mentioned previously, growth in Manufacturing Sector is the only way forward for the economy. Thus the rise in the core sectors along with few others will definitely help the Economy to move forward. Manufacturing Output also constitutes 75% of IIP data.

 

OUTLOOK

 

RBI has set a target of achieving CPI below 5% by March,2017 but with Food Inflation surging it seems to be a very challenging task. The inflationary pressure is expected to rise in the coming months.  

RBI wants to ease Consumer Inflation to 4% which for the time being it seems to be an ambitious target, which will be tough to meet. However, if retail inflation remains within 5%-6%, RBI should be fairly satisfied.

RBI will not look to revise Repo rates immediately as it has to manage the inflationary pressure.

The Wholesale inflation in positive may be good, as it indicates raise in demand, which in turn will lead to increase in productivity thereby leading to better wages and more job creation. However, the rise in food prices will negatively impact the consumers.

Exports are on decline for quite some time now which is impacting India’s inflow. The fall is mainly contributed to poor global demand and softening of crude prices. Global Economic slowdown has not helped India’s cause either. Exports are on decline on 19 months consecutively. 

Global Sentiments are pretty reserved at this point of time with China slowing down. The major challenge at this point of time is to ensure economic stability and safeguard the Interests of developed and developing economies of the world.

India is emerging as the most preferred destination for the Investors and promises to bring in more and more investments which augurs well for the economy as well the as the population.