June WPI eases to 4-month low of 5.43% but inflation could still play party pooper for BJP

Just over a month into the office, the Narendra Modi government seems to be very fortunate. There is good news all over. The stock market is hitting record highs, business sentiment is buoyant, wholesale price inflation has eased to a four month low and there are even credible signs of revival in economy.

The government data on Monday showed that Wholesale price Index eased to a four-month low of 5.43 percent from a five-month high of 6.01 percent in May 2014.

Data on Friday showed Index of Industrial Production (IIP), or factory output, in May rose 4.7 percent hitting a 19-month high. This is an absolute turnaround from the gloom of the previous May, when the index was a a negative 2.5 percent.For June, the CPI data is expected to soften to 7.45 percent versus 8.28 percent in the previous month

Experts have started believing that there are indeed green shoots finally.

“While the favourable base effect may have helped the annual growth print, the steady sequential momentum has been hinting at stabilizing industrial growth. We believe that the policy push directed at boosting the investment cycle, and improving domestic sentiments, should help manufacturing growth to stay in the positive zone for the rest of FY2015,” noted Kotak Securities in a research report.

But the new government cannot rejoice just yet, for the situation on the retail inflation front is still scary. Double-digit inflation in milk, vegetables and fruits is alarmingwhile recent spike in international fuel could also prove to be inflationary.

What is worse is the threat of a poor monsoon and higher oil prices due to geo-political tensions in the Middle East, which have potential to nip the green shoots in the bud.

While the NDA government did highlight that curbing rising prices will be one its top priorities in the Union Budget 2014, even the Economic Survey, which was released a day before the Budget, cautioned that poor monsoons is the biggest risk to cooling prices.

The Meteorological Department has predicted below-normal rainfall at 93 percent of the long period average with 70 percent probability of an El Nino occurring.The odds of a drought are 60 percent now, compared with 25 per ent in April, Skymet, a private forecaster said last week.Besides, crude oil prices are hovering around $110 per barrel. If the unrest continues, India, being a major importer, may see a spike in fuel inflation.

But tough measures on fuel subsidies looks tough. “If international prices drop lower than $108-110/barrel and rupee remains strong (| 59/$) only then can we expect the new government to clear the diesel price de regulation proposal,” said ICICI Direct in a note.

The survey said inflation showed signs of receding with average wholesale price index (WPI) inflation falling to a three-year low of 5.98 per cent during 2013-14 compared to 7 and 9 percent over the previous two years.Consumer price inflation, though higher than the WPI, has also exhibited signs of moderation with CPI (new-series) inflation declining from 10.21 percent during 2013-14 to about 9.49 percent in 2013-14, the survey said.

Food inflation, however, remained stubbornly high during 2013-14, reaching a peak of 11.95 percent in third quarter. Highlighting reasons, the survey said, high inflation, particularly food inflation, was the result of structural as well as seasonal factors.Contribution of the commodity sub-groups, fruits and vegetables, as well as egg, meat and fish to the food inflation has been very high, it said.

However, inflation in Non Food Manufactured Product (WPI core) has remained benign throughout the year, with average inflation moderated to four-year low of 2.9 percent in 2013-14, which indicates that underlying pressures of broad-based inflation have somewhat eased, it said.

IMF has projected that most global commodity prices are expected to remain flat during 2014-15, which augurs well for inflation in emerging market, including India.

The survey has suggested creating a competitive national market for food and reforming the food market. Restrictions on farmers to buy, sell and store their produce needs to be removed, which improving rural infrastructure and setting up warehouses, cold storages, cold chains etc will go a long way in reducing chronic food inflation.

“Presence of intermediaries in the different tiers of marketing, shortage of storage and processing infrastructure, inter-state movement of agricultural produce etc need to be addresses,” it added.

Though short on major reforms, the Union Budget too aimed to address elevated inflation through measures such as greater investment in agriculture sector and linking of MGNREGS to productive asset creation in the rural economy, which will not only help ease food inflation but also break the wage-price spiral.

The government will also continue with sale of food stocks in the open market and correct supply chain inefficiencies, to bring down price pressure.