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Friday, 15 July 2016

Wholesale and Retail Inflation Rise, Industry Output Grows


WHOLESALE PRICE INDEX

Wholesale Price Index (WPI) for the month of June, 2016 rose steadily to 1.62% as compared to 0.79% in the previous month. Inflation is on the rise for past three months and it is the highest recorded in last 22 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 8.18% as compared to 7.88% in the previous month. The fuel and power segment, inflation declined by (-)3.62% as compared to (-)6.14% 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 5.50% as compared to 4.55% in the previous month while Manufactured products rose to 1.17% from 0.91%. 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 April,’16 has been revised to 0.79% from 0.34%.

CONSUMER PRICE INDEX

Consumer Price Index (CPI) rose marginally in the month of June, ‘16 as it stood at 5.77% as compared to 5.76% 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 7.79% from 7.47% (revised) recorded in the previous month. Spike in prices of Vegetables and Sugar 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 soon. 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) rose by 1.2% in the month of May,’16 as compared to decline of (-)1.35% (revised) witnessed in May,2016. IIP figures have been fluctuating for quite some time now as they have failed to gain any momentum.
The rise is mainly contributed to growth in Manufacturing, Mining and Electricity Sector. As manufacturing sector grew by 0.7%, whereas Mining sector grew by 1.3%, while the Electricity Sector grew by 4.7%. The Capital Goods fell steeply for the seventh month in a row by (-)12.4% while Consumer Durables Sector grew by 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 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 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 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 on 18 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.

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