Wholesale and Retail Inflation Rise, while Industry Output Falls

• Posted By Amritesh
• On June 15th, 2016
• Comments: no responses

WHOLESALE PRICE INDEX

Wholesale Price Index (WPI) for the month of May, 2016 continued to rise, gaining 0.79% as compared to 0.34% in the previous month. Inflation is on the rise for past two 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 7.88% as compared to 4.23% in the previous month. The fuel and power segment, inflation declined by (-)6.14% as compared to (-)4.83% 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 marginal rise is the continuous slide in Crude prices in the International Market and weak demand. However, any further rise in Food Inflation may become a cause of concern in the future. The recent prediction by Meteorology Department of good rains this year holds out hope for the economy as a whole, so one would be hoping that Monsoon plays its part well. On month to month basis Primary articles rose by 4.55% as compared to 2.34% in the previous month while Manufactured products rose to 0.91% from 0.71%. The index provides Primary Articles with 20.11% weightage, 64.97% for manufactured products and power & fuel with 14.91%.

CONSUMER PRICE INDEX

Consumer Price Index (CPI) rose to 2 year high in the month of May, ‘16 as it stood at 5.76% as compared to 5.39% in the previous month. Retail Inflation has been on the rise for quite sometime now. Spurt in food prices was the prime reason behind rise. As Food Inflation rose to 7.55% from 6.40% (revised) recorded in the previous month. Spike in prices of Vegetables, Sugar and Pluses were largely responsible for the rise. Consumer Food Inflation has 47% weightage in CPI Index. The forecast for good rains will help to keep the inflation in check. The recent spike in petrol and diesel prices will also not help the retail inflation going forward.

With Inflation on the rise, RBI will not be encouraged to lower the lending rates immediately. However, if monsoon lives upto its promise of good rains and food inflation remains within limits, we may expect rate cut very soon. As Industrial Output is not looking very promising and concerns need to be addressed at the earliest.

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) plunged to (-)0.8% in the month of April,’16 as compared to growth of 0.1% witnessed in March,2016. IIP figures are disappointing it has have failed to build any momentum in the past few months.

The decline is mainly contributed due to slowness in Manufacturing, Consumer Goods and Capital Goods Sector. As manufacturing sector declined by (-)3.1%, whereas Mining sector grew by 1.4%, while the Electricity Sector grew by 14.6%. The Capital Goods fell steeply for the sixth month in a row by (-)24.9% while Consumer Goods Sector too fell by 1.2 %.  

The growth of factory output is essential for the economy. Industrial growth is mandatory to generate jobs for individuals, 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 maintaining CPI below 6% but with Food Inflation surging it seems to be a very challenging task. If monsoon does not deliver on the promise it will make the situation even grimmer.  

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 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 have been 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 consecutively for 18 months now. 

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.