Deflation in WPI is unlikely to give respite to Indian consumers

Summary

Recently India’s wholesale inflation went into negative at -3.2% YoY for the first time since June 2016. Due to a reduction in the global crude oil prices, the wholesale price of fuel and power showed a steep deflation, whereas food articles are still expensive. During the lockdown months, the demand for non-essential items took a hit. However, consumers continue to pay heftily for essential food materials. Since the pandemic, the Reserve Bank of India has cut repo rates by 1.15 percentage points for boosting consumption. Here is an analysis of the immediate reason for wholesale deflation and its possible impacts on the Indian economy, especially retail consumers.

Deflation at the wholesale level began as we moved into the lockdown phase

The wholesale inflation in India has been on a slope since October 2018. It fell from 5.5% YoY in October 2018 to 0.2% YoY in October 2019. However, in November, it showed a marginal hike to 0.6% YoY due to a spike in the prices of vegetables like onion and potato. The trend continued till January 2020, and the wholesale inflation for the month was recorded at 3.5% YoY. Since February, the trend again reversed due to the early impacts of the pandemic.

WPI shows deflation whereas Food remains expensive

In India, pandemic prompted lockdown started in the last week of March, and since then, we experienced a considerable decline in consumption and demand. The WPI inflation fell to  0.9% YoY by March, and fuel went into 2.5% YoY deflation. The steep fall in global crude oil prices further contributed to the WPI deflation. The latest data released for May have taken many by surprise. The overall Wholesale Price Index fell to -3.2% YoY, where the fuel and power index went down by 19.8% YoY. However, the WPI Food Index is still at an inflation of 2.3% YoY.

Low non-essentials demand are to blame

As manufactured products account for about 64% weightage in WPI, a deflation of 0.4% YoY in the same has also contributed significantly to overall WPI deflation. Apart from the inflation in manufactured food products, non-food manufactured products has shown a broad-based deflation in May, reflecting demand for only essential items during the lockdown. Weak demand for non-essential items can also be reflected in the fall in industrial output. It went into negative for the first time in many years on a YoY basis. In March, it went down by 18.3%, and in April, it shrunk further by a whopping 55.5%.

A slump in Industrial output amidst lockdown measures

Relief to consumers

By the first impression, it may seem like a reduction in the WPI may result in less pressure on consumers. However, this is not always true. CPI and WPI deal with different sample sizes and weightage of commodity groups, the WPI trend is often not replicated with the CPI trend. The current period is an example. Despite the WPI-fuel and power in deflationary mode, the CPI Inflation for fuel & light stood at 1.4% YoY in May. The reason is that the benefits of lower crude oil prices in the international market are not passed entirely to the consumers. The inflation in consumer prices as far as food items are concerned stands at a whopping 9.3% YoY in May.

The consumers are unlikely to benefit from the price reduction in the wholesale level as power is still expensive, and we have come across severe crop damage through infestation. Affording food items is still going to be heavy on retail consumers’ pockets.

CPI contrasts the trend in WPI 

Warning of a recession

WPI deflation shows early signs of steep fall in consumer demand. With more than 70 days of lockdown, people have primarily been purchasing essential items. This has single-handedly deteriorated demand-supply chain in the economy. Though deflationary traits are yet to be shown in the consumer index, it isn’t the time to sit tight and wait for the things to settle. The Reserve Bank of India has been using CPI as its nominal anchor for drawing monetary policy. As CPI data may not be available early, WPI data can be treated as an early warning.

Has inflation taken a back seat?

The Reserve Bank of India has cut policy rates by 40 basis points in the last one month. The repo rate stands now at 4%, the lowest ever in history. RBI’s stance has also been accommodative for the future. As RBI is currently considering injecting more liquidity so that economic activity begins, we should not expect anything from the RBI to do anything for deflation at the wholesale level.

Room for further rate cuts

Prices at the consumer level are very different from the trend at the wholesale level. The consumer food price index is at a high inflationary zone even during the lockdown months. However, the demand curve has flattened in the last few months. Lower demand in the economy coupled with steep fall in the industrial production does provide the RBI some extra room for further rate cuts. In the last monetary policy committee meeting, the RBI governor also emphasized on easing of financing conditions to push consumption and investment during the pandemic.

Written by:

Guest Columnist

Amit Parhi

[email protected]indiamacroadvisors.com