Pulses check WPI's negative spiral

But, slack demand keeps core readings morose

The fall in Wholesale Price Index (WPI) based inflation was less steep in October, at -3.8 per cent compared with 4.5 per cent in September, as a sharp rise in pulses inflation pushed food inflation (primary + manufactured) up. But, weakness in global crude oil and commodity prices kept overall headline inflation in negative territory. Domestic demand, too, continued to remain slack, keeping manufactured products' inflation as well as core inflation in negative territory. Core inflation, as measured by the CRISIL Core Inflation Indicator (CCII), stood at -0.4 per cent, better than the -0.7 per cent recorded last month.

Food inflation (primary food articles + manufactured food products) rose to 1.7 per cent in October, compared with 0.2 per cent last month. The increase was mainly due to pulses (weight of 0.7 per cent in WPI), which saw inflation spike 53 per cent in October, the highest in a decade, up from 38.6 per cent in September.

The highest inflation rate among pulses articles was recorded in tur (arhar) at 73.1 per cent, followed by gram (56.9 per cent) and urad (66 per cent). Across pulses categories, inflation has spiralled, but the sharpest rise is in tur - 46.2 per cent - where sowing this year has lagged trend. CRISIL's Deficient Rainfall Impact Parameter, which measures crop-wise impact of weak rains, highlights tur as the most affected crop this year.

Adverse supply shocks at frequent intervals have exacerbated the upward pressure on pulses prices - a commodity where supply has lagged demand in recent years. Supply shortfall has had a larger role to play than demand in the current spike. The demand-side influence is weak as rural wage growth has been declining dramatically and also GDP growth is much weaker.

Successive monsoon shocks to production have led to an increase in prices. In 2014-15, pulses production fell 4.3 per cent, and this year estimates suggest kharif pulses production growth at 1.1 per cent is much below the trend growth rate of 4.3 per cent. Two successive years of deficient south-west monsoons hurt the kharif pulses production, while weather related disturbances in March destroyed the rabi pulses crop (which is about 68 per cent of the total production).

Manufactured products inflation remained in the negative zone and was unchanged from the last month, at -1.7 per cent. Here, while inflation in manufactured food rose to 0.2 per cent from -0.7 per cent in September, almost all other major categories recorded a lower inflation rate relative to September.

Two factors are at play behind the low manufactured products inflation - sluggish domestic demand conditions and continued softening in global commodity prices. The former has disallowed an increase in market prices whereas the latter has brought down input costs for Indian manufacturers.

So far this financial year, global metals and minerals prices have fallen an average 21.3 per cent on-year and global fuel prices have slipped 45 per cent, while the rupee has weakened by only 6.9 per cent, bringing down cost of production.

And, given slack domestic demand conditions (with the added impact of a second consecutive deficient monsoon which has dented rural incomes), core inflation measures have remained negative. The CRISIL Core Inflation Indicator (CCII) stood at -0.4 per cent in October compared with -0.7 per cent in September. CCII inflation rate has been declining for 15 months now and has been negative since July this year.

Another measure of core inflation, non-food manufacturing inflation (which includes the volatile base metals category), was at -2.1 per cent in October compared with -1.9 per cent last month.

CCII offers a better perspective on core inflation because it negates the effect of volatile categories. It excludes base metals as their prices are mostly determined by changing global demand-supply dynamics and volatility in exchange rate rather than just domestic conditions.

This exclusion causes a variance in CCII and non-food manufacturing inflation. Global metal prices dropped 23.3 per cent on-year in October, pushing wholesale price inflation in the basic metals category down to -7.5 per cent in October, compared with -6.7 per cent last month.