Inflation takeaways

Narrowing gap between CPI and WPI has key policy implications

India's Wholesale Price Index (WPI)-based inflation shot up by 3.55 per cent in July, up from 1.62 per cent in June. This comes on the back of the Consumer Price Index (CPI)-based inflation touching a 23-month high of 6.07 per cent for the same month. As in the case of CPI, WPI inflation, too, has risen largely due to the spike in the prices of food articles. Food inflation is up by 11.82 per cent thanks to higher prices of cereals, vegetables, fruits, potato and pulses - similar to how these commodities contributed to retail inflation. But WPI inflation was also adversely affected by the 9.5 per cent hike in non-food articles, especially the prices of fibres, which rose by about 26 per cent.

Even though both have witnessed a sharp rise since April, the CPI and WPI inflation numbers are on expected lines. The lack of rainfall over the past two monsoons combined with the government's handling of the food economy, as well as a delayed monsoon this year, have all contributed to the current price rise. It is for this reason that the Reserve Bank of India in its last policy review on August 9 upped the risks to its March 2017 CPI inflation target of five per cent. Of course, the current spike, driven largely by seasonal factors, is expected to weaken as most of India continues to benefit from an above normal monsoon - barring Gujarat and Odisha, all states have had their expected share of rainfall. Farm acreage has increased this year, in particular for pulses, whose prices have been a political embarrassment for the government.

Yet, the sharp rise in WPI - it was in negative territory until March - is not without crucial policy implications. The increase in WPI narrows the gap with CPI. This is crucial both for fiscal and monetary policymaking. For the most part of the National Democratic Alliance government's rule, WPI inflation has been in the negative, thanks to a sharp fall in crude oil prices. However, CPI or retail inflation continued to soar well above the five-per cent mark. This created an anomaly wherein the fiscal policy decision-makers in the government claimed the economy was experiencing deflation, because they look at WPI as the inflation index, while the monetary policy decision-maker, the RBI, which uses CPI as the inflation index, claimed that there were massive inflation risks in the economy. As such, it was natural for the government to claim that RBI was keeping interest rates way too high and, in the process, hurting the possibility of an economic recovery. RBI, under Raghuram Rajan, continued to keep interest rates up for the most part. With the difference between the two inflation indices narrowing, one should expect the economic assessment of RBI and the government to clash less than it did in the past.

Secondly, the wide gap between CPI and WPI also gave rise to a lot of debate about the true growth rate of the Indian economy. Depending on the price deflator used to arrive at the real growth figures (from the nominal figures), India's growth was said to range between four-five per cent by some and seven-eight per cent by others. The closing of the WPI and CPI gap will also help bring some consensus about India's true growth rate.