India’s wholesale inflation hit 15.08 per cent in April, the highest in 27 years. The massive increase in electricity and fuel prices is mainly responsible for this inflation. Inflation has been in double digits for the 13th consecutive month. The underlying causes of inflation include global supply-chain disruptions and the Ukraine war. On May 12, the National Statistical Office (NSO) released data showing that retail inflation, as measured by the Consumer Price Index (CPI), stood at 7.79 per cent this April, down from 7.87 per cent in April 2014. after the highest level. Data released by the Ministry of Commerce and Industry on May 17 shows that inflation, as measured by the Wholesale Price Index, rose to 15.08 per cent in April. This is the highest wholesale inflation rate in India since March 1995.
The rising inflation can be properly understood from the wholesale prices. For example, what was Rs 100 in April 2011 became Rs 125 in November 2020, it took 115 months for Rs 100 to reach Rs 125. But in the subsequent 17 months i.e. in April 2022, the same thing became more than Rs 150. Meaning inflation has increased very rapidly in the last few months. After all, what are the reasons for such a sharp increase in wholesale prices? There are many reasons for this acceleration. Inflation in all three main sub-categories of the WPI: primary goods (22.6 per cent by weight), fuel and electricity (13.15 per cent by weight) and manufactured products (64.23 per cent) have been growing in double digits since November 2021. However, only in the fuel and power sub-category, inflation has been showing an annual growth of over 30 per cent every month since October 2021. Wheat wholesale prices have risen in double digits (10.7 per cent) for the sixth consecutive month in April 2022.
The fact that food prices are now lagging behind non-food prices also means that farmers are currently facing a decline in terms of trade or in proportion to the prices paid. Experts believe that this does not bode well for rural demand. Policy decisions like banning wheat exports may add to this apprehension and will also have marginal benefit in controlling overall inflation. With very low production and price reversal, rural agricultural demand will be hit. In fact, wheat export restrictions may reduce the risk, but increase the risk on the GDP front.
Certainly India is not the only country facing high inflation or inflation at the moment. There is a continuous disruption in the supply chain due to the COVID-19 pandemic. Things have gotten worse after the latest outbreak in China. The pressure on already weak supply has increased, increasing demand in developed countries. Above all, the Ukraine war has created a major disruption in global fuel and food supplies.
It is important to note here that the Wholesale Price Index actually represents more of the market for producers rather than consumers. This is why the Wholesale Price Index includes metals and major industrial chemicals such as fertilisers. This does not include things like personal services and accommodation. This means that both these indices reflect the price movements of different products. India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI), stood at 7.79 per cent in April. This means inflation is the highest since the current government took office in May 2014. Keep in mind, in November 2013, during the Manmohan Singh government, the Consumer Price Index had reached 11.5 percent. Right now most analysts expect inflation to not hit double digits. How different is the inflation situation today as compared to 2013-14? While the growth of the Retail Price Index was high in the past, the Wholesale Price Index is currently showing unprecedented growth. This shows that right now the effect of inflation is more on production or manufacturing and a little less on consumers. Experts believe that a section of the producers are still bearing a part of the inflation themselves and the prices of their products have not increased with the times.
What can we say about the demand-supply mismatch in the Indian economy right now? In the neat world of economics textbooks, inflation or inflation is mostly the result of demand exceeding supply in the short run. What is the contribution of excess demand in increasing inflation in India at present, despite the shocks globally? There is no complete data in this regard, so it becomes difficult to solve this question. Are some parts of the organized sector in the country currently experiencing a strong recovery? Both the manufacturing and services sectors are showing expansion from July and August 2021. Capacity is being fully utilized in the organized industry. Even though the data here is based on small samples, it is likely that the performance of the organized sector has improved. At least one part of the Indian economy has seen strong demand in the recent past. Yet in totality there has not yet been a complete return of demand. The available data indicates that demand continues to decline, basically across a large segment of the consumer community. The purchasing power of the people has decreased in a part of the cities. This complicates the challenge before our economic policy.
Now there is little pressure in monetary policy to increase interest rates and reduce liquidity. If the government shares the prices of petrochemicals with the consumers, then there will be a dilemma for the exchequer. If something is done against food price inflation, the income of farmers will suffer. Indeed, the Indian economy is passing through a challenging time.