2021, the year that was: Firms may no longer share higher cost burden

The concluding part of year-ender series looks at how inflation pinched consumers' pocket

At a broad and rough level, wholesale mandis were selling goods at prices 2.5 per cent higher at the beginning of 2021 than those a year earlier. On the other hand, consumers were getting goods and services at 4.06 per cent higher prices over this period.

By November, the situation took a dramatic turn and wholesale mandis sold goods at 14.23 per cent higher prices year-on-year, while consumers shelled out 4.91 per more in the month on a yearly basis.

This assessment assumes wholesalers sold and consumers bought goods and services in accordance with their weightings in the consumer price index (CPI) and wholesale price index (WPI).

This means companies are still not able to pass on increased prices to consumers in entirety because there is a lack of demand in the economy, pressuring their margins. However, there are reports of some pass-through.

The situation may not remain so and companies will no longer suppress margins much.

“This is going to happen. The WPI captures what is happening at the raw material and intermediary stages. The pass-through time is usually three to four months. It is almost not the entire pass-through. With these levels of the WPI, it is bound to affect retail prices,” former chief statistician Pronab Sen said.

ICRA Chief Economist Aditi Nayar said the WPI was sensitive to changes in global commodity prices and transmission to it was quick.

“Producers tend to watch the situation a little longer before passing on price increases to consumers. This makes transmission to the CPI lower and slower. There is some evidence of price increases in India now because producers are no longer able to compress margins further,” she said.

However, there are items for which consumers are paying too hefty a price. Among food items, for instance, they paid 31.35 per cent more for tomatoes in November than in the same month a year ago, while they got this item at 3.65 per cent lower prices in January year-on-year. On the other hand, the inflation rate in edible oils remained high throughout the year. Consumers bought them at 24 per cent higher prices in January than in the same month in the previous year. By November, they shelled out 33 per cent more than they did a year ago.

While tomato prices are seasonal and may cool in a couple of months, those of edible oil remained high despite a cut in import duties. The government brought down customs duty on crude edible oil to nil and reduced the agricultural cess on crude soybean and sunflower oil to 7.5 per cent from 20 per cent in October. Also, basic customs duties on various refined oils were reduced to 17.5 per cent from 32.5 per cent. The government has been lowering import duties on edible oils since February this year. The importance of import duties could be gauged from the fact that India ships in around 56 per cent of the edible oil the country consumes.

To tame rising food prices, the Securities and Exchange Board of India (Sebi) recently barred exchanges from launching new futures contracts in seven food items -- paddy (non-basmati), wheat, chana, mustard seeds and their derivatives, soybean and its derivatives, crude palm oil, and moong -- for one year with immediate effect.

This was done even as retail inflation was not high for many of these commodities -- for instance, the inflation rate of rice being just 0.95 per cent in November compared to 1.11 per cent in January year-on-year. Similarly, the price of wheat increased 2.42 per cent against deflation of 4.85 per cent. In fact, chana also saw the inflation rate coming down to 5.71 per cent against 8.84 per cent. Moong had just 0.19 per cent inflation in November against 15.63 per cent in January.

However, as cited above, edible oils had a high inflation rate.

India Ratings Chief Economist Devendra Pant said banning futures would have some impact on the prices of those commodities. For commodities that are largely imported -- such as edible oils -- global rates would affect prices, he said.

Industry players, however, say edible oil prices might soften next year.

Suresh Nagpal, chairman of the Central Organisation of Oil Industry and Trade, the apex body of the edible oil industry, said the prices of edible oils would soften next year because of the multiple import duty cuts and the expected bumper output of oilseeds in the rabi season.

The hardening of prices of edible oils globally could be gauged from the fact that the price index of oil and meals rose from an average of 89.8 during 2020 to 131.6 per cent in November this year, according to The Pint Sheet data by the World Bank.

While there was wholesale price deflation of 7 per cent and 10 per cent in petrol and diesel, respectively, at the beginning of this calendar year, the prices of each skyrocketed to more than 85 per cent by November. 

Consumers paid more than 12 per cent higher prices for each of the two fuels in January this year over the same month in the previous year. The retail price inflation rate cooled in November from 27 per cent in the case of petrol and 32 per cent for diesel in October. This happened because the Centre had cut excise duties by Rs 5 a litre for petrol and Rs 10 a litre for diesel, followed by reductions in value-added tax in various states.

But this did not happen for wholesale prices. Petrol witnessed inflation of 65 per cent in October and diesel 72 per cent year-on-year. The official explanation for this was that the WPI captured the average movements of wholesale prices of goods and reckoned only basic prices, which do not include taxes, rebates, etc.

If one leaves out fuels and food, the remaining part, called core inflation, remains sticky in the case of retail inflation throughout the year. It remained between 5.5 and 5.9 per cent. However, the core inflation rate more than doubled from 5.5 per cent in January to 12.2 per cent in November in the case of the WPI.

Sen said stickiness in core retail inflation was due to the pricing power of companies.

“From demonetisation onwards, micro, small, and medium enterprises have been badly hammered. The overall level of competition for the core has reduced quite dramatically,” he said.

Earlier, when prices of raw materials went up, part of that increase used to be absorbed by reduction in margins, and some would be passed on because competition would not allow producers to pass on the entire increase. If competition reduces, companies can pass on larger amounts of the cost increase, Sen said.

Nayar said core retail inflation had been sticky because of hardening global commodity prices -- metals, chemicals, etc.

Even November showed some easing in global prices. For instance, the global iron ore price index came down from an average of 108.9 points in 2020-21 to 96.2 in November this year, according to the World Bank (The Pink Sheet) data.