WPI At Zero – Are India’s Inflation Worries Over?


InflationThe past few months have been spent by Indian economists and market watchers in keen observation of the inflation rates, more specifically the fall in the country’s inflation levels. November’s inflation scorecard is out – inflation as measured by the WPI (wholesale price index) for the month has dropped to zero. This has been the lowest in over five and a half years. Inflation measured by the Wholesale Price Index was estimated at 1.77 percent for the month of October this year and 2.38 percent in September 2014. As for November 2013, same month a year ago, the WPI based inflation was estimated at 7.52 percent. Food prices have dropped significantly and manufactured items are inexpensive as well. The major cause that has been cited for the drop in inflation levels is the dramatic drop in oil prices.

This is the first time that the WPI-based inflation has reached an exact zero. In July 2009, the last time WPI inflation was lower than the current level, it was 0.3 percent.

Consumer price index (CPI)-based inflation in November also eased to a record low of about 4.38 percent. The decline from an estimated 11.16 percent in November 2013 is a considerably sharp one. Retail inflation in October 2014 was at 5.52 percent.

Inflation has been India’s biggest worry

Inflation has been one of India’s traditional economic woes and worries. Food inflation has caused the biggest outcry in recent times. In September last year the price of basic food items such as onions and unemployment rates shot up and the value of the domestic currency dipped causing much public outcry. Their inability to curb inflation was one of the biggest challenges faced by the Congress-led Government at the Centre, and perhaps one of the key factors for their dismal performance in the Lok Sabha elections of 2014. The promise to bring down the inflation rates could well have brought the NDA to power and predictably it featured high on Finance Minister Arun Jaitley’s agenda as he took the oath. Even as recently as July 2014 the CPI-based inflation was pegged at about 8 percent.

Is WPI the right measure?

The WPI-based inflation statistics are calculated by the Office of the Economic Adviser, the Department of Industrial Policy and Promotion, and the Ministry of Commerce & Industry while the CPI inflation estimates come from the Central Statistics Office and the Ministry of Statistics and Programme Implementation.

In July 2011, the then RBI Governor, D Subbarao, had stated, “Conceptually, the CPI is a better indicator of demand side pressures than the WPI”. This is because consumer prices better reflect the dynamics of the markets than wholesale prices do. This leads to a better estimate of the inflation in the country. Current RBI Governor Rajan prefers the CPI due to the accuracy it lends to the study of inflation in the context of its monetary policy. Most developed countries use the CPI index. India’s dependency on WPI inflation data comes from a lack of a unified CPI computation mechanism till about a few years ago.

Rate cut – Is the RBI ready?

What is undeniable is that the lowered inflation has put pressure on the Reserve Bank of India to review its credit policy and cut interest rates. The RBI has been resisting pressure both from the Finance Ministry and from the corporations of India. RBI Governor Raghuram Rajan, has been very hawkish in this regard. Having taken up the job at a time when the Rupee’s volatility and skyrocketing inflation were sending jitters through Indian economists and investors were apprehensive of the Indian markets, Rajan can hardly be blamed for having taken a cautious approach.

While WPI-based inflation getting to a zero level does warrant a serious review of the credit policy maintained by the RBI, it is also important to understand that the Central bank accords more weightage to retail inflation when it comes to assessing the credit rates. But with retail inflation hitting a record low, the RBI will now be forced to choose its course of action wisely. For now, we must look forward to RBI’s review session in January to know if any rate cuts are on the cards.

Is deflation a real possibility?

India’s inflation woes are far from over. The worry now is that the country’s slowly stabilizing economy might be unhinged by deflation. According to a recent news report, Pronob Sen, the chairman of the National Statistical Commission, said, “Inflation has fallen too far. What matters is manufacturing and a manufacturing inflation below 3% points to deflation. It is not very good.” If inflation rates turn negative, prices are likely to go down below the previous year’s rates. This, in terms of the manufacturing sector, could mean that the pricing power is taken away from companies and profits are consequently lower. If allowed to continue, it could lead to job cuts and hike in unemployment rates. Some economists, however, feel that a poor kharif crop this year could see the WPI inflation index soon pick up to non-threatening levels.

Inflation and the NDA Government

The Bharatiya Janata Party has been quick to credit the NDA government led by Narendra Modi for the fall in the once-threatening inflation rates. The “good governance and development policies” were responsible for such a positive state of the economy, said the party. While it is true that the Finance Ministry has made lowering inflation a key agenda, while at the same time attempting to boost the manufacturing sector by launching its flagship ‘Make In India’ campaign, the role of RBI’s prudent policies and a global fall in crude oil prices should not be overlooked. What now remains to be seen is how well the administration treads the line between low inflation rates on one side and growth and development on the other.