Wholesale prices fall the most in four decades

Pulses continue to witness high inflation at over 30%

Wholesale prices declined 4.05 per cent in July, the ninth consecutive monthly fall and the steepest in about four decades, primarily due to cheaper food items, oil and manufactured products. This, together with softening consumer price inflation, prompted economists to forecast the central bank would cut the policy rate, either at its monetary policy review in September or earlier.

In June, Wholesale Price Index (WPI)-based deflation (the rate of fall in prices) stood at 2.40 per cent; in July 2014, inflation stood at 5.41 per cent.

Reacting to the announcement of the data for July, Finance Minister Arun Jaitley said, “That’s a very positive sign, as far as we are concerned...This speaks of the stability of the economy we are in. Inflation is under control, manufacturing and IIP (Index of Industrial Production) figures are quite encouraging, and the indirect tax revenue figures are extremely encouraging.”    

Adding: "Even if you take out additional revenue measures, we still have a significant growth."

On whether the central bank should cut the policy rate, he said, "I am sure we all know the relationship now."

Chief Economic Advisor Arvind Subramanian said, "I think the latest inflation numbers - CPI, WPI - and other data such as that on growth in bank deposits and moderation in gold import point towards not just a decline in inflation but, perhaps, also to a big structural shift in the underlying process of inflation, something very encouraging."

 

For the first time in nine months, food items saw fall in prices, showed official data released on Friday. Data released earlier this week had shown CPI inflation fell to an eight-month low of 3.78 per cent in July.

Protein-based food items, however, defied the declining trend. For instance, inflation for pulses rose to 35.75 per cent in July from 33.67 per cent in June, while that for milk increased from 5.18 per cent to 5.3 per cent over this period. Egg, meat and fish, which saw a fall of 2.25 per cent in prices in June, recorded 2.52 per cent inflation. In May, this category had recorded deflation of 4.04 per cent.

Before CPI inflation started rising from 2012, the Reserve Bank of India focused on core WPI inflation (that for non-food manufactured items) to determine its policy stance. For July, core WPI deflation eased to 1.39 per cent, the lowest since October 2009, showed an analysis by YES Bank's chief economist.

"Despite lingering monsoon-related uncertainties, a hardening of inflationary expectations and the recent depreciation of the rupee relative to the dollar, risks to the inflation trajectory have diminished with the modest build-up of food prices and the recent fall in commodity prices, suggesting adequate room for further monetary easing," said ICRA senior economist Aditi Nayar.

Owing to a glut in the case of sugar in July, prices fell 17.48 per cent, against 11.89 per cent in June. The government is considering offering incentives to farmers, other than minimum support price, to switch to pulses farming. For sugar, the government has decided to provide soft loans to enable millers pay arrears. It has also extended import duty hikes and increased blending of ethanol in petrol. It is also considering bartering export of sugar with imports of pulses.

Wholesale prices fell across the board, both in the food and non-food categories across primary items (non-processed).Within food items, onion prices fell 0.49 per cent in July, against inflation of 18.54 per cent in the previous month.

In the fuel and power category, every segment recorded deflation. Among manufactured products, a few items saw higher inflation - wood and wood products (6.57 per cent in July against 5.03 per cent in the previous month), paper and paper products (2.54 per cent against 2.27 per cent) and transport equipment and parts (1.25 per cent against 1.18 per cent). Other items either saw a fall in prices or a decline in inflation.

India Ratings chief economist Devendra Pant said a sustained decline in WPI was good news for companies. "Though retail inflation has also fallen, the gap between CPI and WPI has increased. This, along with a 30 basis point median decline in base rate, augurs well for corporate sector profitability, which is likely to reflect in balance sheets from the next quarter," he said.