You are here: Home » Economy & Policy » News
Business Standard

Wholesale food inflation likely to dip in coming months, says report

The gap between WPI and CPI food inflation was the highest in the past decade, says Credit Suisse report

Abhishek Waghmare  |  New Delhi 

fruit and vegetables market, Inflation

After rising at a hefty pace in recent times, the prices at which farmers sell their produce in wholesale mandis could grow slowly in the coming months if past trends are an indication, an analysis presented in a Credit Suisse report has said.

This could spell trouble for the farm sector as wholesale food prices have remained tepid for a considerable period in the past couple of years. Research has also shown that a slowdown in the rate of rise in wholesale food prices also leads to a slowdown in rural wages, which could possibly add to worries.

Wholesale price index (WPI) food inflation rate was recorded at 4.3 per cent in February 2019. For the same month, the consumer price index (CPI) food deflation rate stood at 0.1 per cent. The gap between the two, at 4.4 percentage points, is the highest observed in the past decade, said the India Market Strategy report by the global brokerage.

In the past few instances when there was this huge a gap between the two inflation rates, it was the WPI which slowly "fell towards" CPI in subsequent months, and not the other way round, it noted.

If the same happens this time around, WPI inflation would reduce — meaning the wholesale price index would grow slowly. This nearly translates into slow growth in wholesale prices of farm produce.

On the current status of WPI food inflation, the report said: "Some have read better farm incomes (because of better procurement) into higher wholesale prices, and justifiably so." Lower wholesale prices would then, conversely, mean reduced farm incomes.


Wholesale food inflation likely to dip in coming months, says report

Economists said this widening gap is a result of the difference in composition of the two indices. While food articles have a weight of 15 per cent in the WPI, food carries more than 45 per cent weight in the CPI basket.

"The difference in this composition generally leads to CPI-WPI anomaly. For example, a drop in the price of vegetables would reduce CPI faster than WPI," said Madan Sabnavis, chief economist at CARE Ratings.

Though the report did not give particular reasons for the huge gap between the two ratios, it said — using the data from the consumer affairs department — higher margins between the wholesaler and the retailer is unlikely to be the reason.

In comparison to the past few years, the markup between retail and wholesale prices "has not changed meaningfully", the Credit Suisse report noted, analysing eight food items.

India Ratings Chief Economist Devendra Pant said: "Convergence between the two indices is unlikely to happen for a prolonged period. It would happen more by chance than by economic factors."

The CPI and WPI inflation levels for milk and fruits, which are considered premium food consumption items, have remained similar, trouncing the overall trend.

However, if current drought-like conditions continue, WPI-food could rise faster than its CPI counterpart, the report said.

"CPI inflation should rise nevertheless, but only to 3.2-3.5 per cent, leaving room for rate cuts," it noted. The Reserve Bank of India reduced repo rate by 25 basis points to 6 per cent in its Thursday meeting.

First Published: Fri, April 05 2019. 00:50 IST
RECOMMENDED FOR YOU