Explained: Why India's wholesale prices are at a high, what will happen in future

A marginal decline in the WPI inflation is mainly due to the softening of the wholesale prices of primary articles, particularly the food items such as wheat, rice, pulses, vegetables and fruits, milk, eggs, meat and fish among others, writes ETV Bharat Deputy News Editor Krishnanand Tripathi.

New Delhi: India's wholesale inflation, measured as the wholesale price index (WPI), was at 10.66%. This is the sixth straight month when the increase in the wholesale price index is more than 10% in comparison with the wholesale prices during the same month last year.

However, there is a steady moderation during these six months as WPI declined from 13.1% in May this year to 12.1% in June and then further declined to 11.6% and 11.4% in July and August respectively. And it eventually settled to 10.66% in September, the lowest in the last six months.

The marginal decline is mainly due to the softening of the wholesale prices of primary articles, particularly the food items such as wheat, rice, pulses, vegetables and fruits, milk, eggs, meat and fish among others. The primary articles, which also have oil seeds, crude, and natural gas, have a weight of nearly 23% in the wholesale basket tracked by the government.

Read: WPI inflation at 6-month low of 10.66 pc in Sep; food prices ease

The primary article index rose by just 4.1% in September this year in comparison with the prices during September last year.

The data showed the wholesale price of wheat increased by 4.47%, pulses (9.42%), and the prices of eggs, meat and fish were up by 5.18%. At the same time, it recorded a massive decrease of 49% in the wholesale price of potato and 32.45% decline in vegetable prices during the rainy season. Prices of onions, fruits and paddy also moderated in September on a year-on-year basis.

Wholesale price index for primary article was 4.1% in September which is at the lowest level in 7 months.

Sunil Sinha, Principal Economist with India Ratings and Research, says the moderation in wholesale prices in September was mainly due to softening of primary articles, and also due to fuel and power prices which moderated to 24.8% in September as against 26.1% in August this year.

Sinha said it happened because of a drop in electricity prices by 6.7% in September 2021. Also, food inflation dropped to 1.1% in September 2021 due to the deflation in vegetables which declined by 32.4% year-on-year basis.

“This is the sharpest fall in the vegetable prices in the 2011-12 series,” Sinha explained. “This moderation was added by a 12% fall in the prices of manufactured tea and coffee products.”

Edible oil

The high prices of edible oils in wholesale markets remain a cause of concern. The data showed edible oil prices were up by 37% in September this year against its prices in September 2020.

However, there is some moderation in edible prices as they had jumped by 52% on a year-on-year basis in May this year.

The rising prices of edible oils in wholesale and retail markets forced the government to cut the export duty. After rationalising the import duty on edible oils, the Centre Thursday asked 8 states (Rajasthan, Madhya Pradesh, Maharashtra, Gujarat, Uttar Pradesh, West Bengal, Tamil Nadu and Andhra Pradesh) to bring down the edible oil prices in their area in line with the reduction in import duties.

The Centre said the reduction in import duty should bring down the edible oil prices by Rs 15-20 per litre.

What is keeping the prices high

Fuel and power index, which has LPG, Petrol and Diesel, was up by nearly 25% in September on a year-on-year basis.

While the price of LPG was up by more than 54%, the price of petrol was up by 55% and price of diesel was up by 52% in comparison with their prices in September 2020.

The fuel and power index has a weight of 13.15% in the wholesale price basket but high fuel prices, as both petrol and diesel prices are at a record high, feed into the entire economy.

Manufactured products

Similarly, the manufactured items, which are the biggest component of wholesale price basket accounting for 64.23% weight in the index, were up by 11.41% in September this year as against their prices in September last year.

Textile products were up by nearly 17%, chemicals (13%), and paper products by 11.59%.

In September, mild steel and semi finished steel prices were up by 20%, the wholesale price of basic metals, which has 9.65% weight in the WPI, was up by nearly 27%, and the wholesale prices of fabricated metals were up by more than 15% on y-o-y basis.

Sunil Sinha says core and manufacturing inflation have stayed put at 11.1% and 11.4% respectively in September 2021 which is the third straight month when they are in excess of 11%.

He said it was primarily due to the higher input costs which manufacturers are passing on to their output prices.

“Since fuel is a major input for transportation, high fuel prices push up this cost which further has a direct and indirect impact on the manufacturing sectors in the economy. Consequently, inflation in seven groups namely, textiles, paper, chemicals, rubber & plastics, basic metals, fabricated metals and furniture has been double-digits now for four successive months,” he said.

Coal crisis, high fuel prices may aggravate the situation

Talking about the near term outlook for wholesale inflation, Sinha highlights the adverse impact of coal shortage and high fuel prices that feed into other sectors of the economy.

Due to a variety of reasons, including unseasonal rain and stagnant domestic production, coal fired power plants in the country are facing a shortage of coal. Experts believe that a persistent coal crisis will eventually feed into electricity prices with a ripple effect on several other sectors of the economy such as the manufacturing sector.

Read:Retail inflation falls to 4.35 pc in Sep; lowest in five months

Talking about the high coal prices in India and the world, Sunil Sinha says it means the fuel and power category will continue to witness elevated levels of inflation exerting pressure on input cost of the manufacturing sector.

He also highlights the adverse impact of the Delta variant on the global supply chain.

“The supply chain which was disrupted by the Covid 2.0 has not fully recovered. Further with the spread of the delta variant of Covid-19 in many countries across the globe, even global supply chai and trade is facing fresh challenges leading to higher transportation costs,” Sunil Sinha said, adding that the wholesale inflation is likely to remain elevated in the near term.