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The previous financial year ended with an inflation rate of less than 3 per cent. This is lower than expectations and the lowest in two decades. Are the structural changes of the '90s instituted by RBI (Reserve Bank of India) finally paying off? For about 50 consecutive weeks now, the change in Wholesale Price Index (WPI ) has been less than 5 per cent. The Consumer Price Index (CPI), which is supposed to reflect price change at for the end consumer, dipped below 5 per bcent in July '99 and is still submerged. Is this sheer chance or something more in line with the factors that govern the Indian economy? The answer could be a mix of both. The WPI has three parts — primary articles (weightage of 32.29 per cent), fuel group (weightage of 10.66 per cent) and manufactured articles (weightage of 57.04 per cent). Primary articles — meaning unprocessed crops of food items and fibres plus livestock — are vulnerable to the vagaries of nature. For example, in '98-99, during the onion crisis, inflation in the primary articles group ruled at a high of 11.7 per cent. Subsequently, this dropped to 2.6 per cent (till February '00) and has remained low ever since. This is contrary to expectations that inflation would rise after December '99 because the base effect was unavailable. The fuel group comprises mineral oils, electricity and coal. Inflation in this segment always tends to be high. In fact, in six of the last 10 years, inflation rate in the fuel group has averaged more than 10 per cent. However, over the last two years it has dropped. In ’98-99, inflation rate averaged 4.3 per cent and in '99-00 (till February), it hovered at 8 per cent . The largest contributor to the low inflation rate, as measured by the WPI, has been the 'manufactured products' group, where prices rose just 0.4 per cent, compared to 4.6 per cent in '98-99. This represents a dramatic drop in inflation rate. Manufactured products is also the area that is most significant among the three components of inflation. There are two reasons for this — the high weightage and the fact that this group is vulnerable to structural changes in the economy. That is, this group is more influenced by policy than the primary articles group. What is driving low manufacturing inflation? The manufactured product class consists of a few hundred items. As such, drawing generalised conclusions is hazardous. If inflation rate in this group is low it's because of certain definitive factors — low input prices, producers' effort to boost demand or even competitive pressures. The last factor is the most important because it has long-term implications about the behavior of inflation. Qualitative and anecdotal evidence suggests that competitive pressures, both internal and from imports, could have played an important role in keeping manufacturing inflation low. If so, manufacturing inflation is not likely to rise in a hurry in the near future. Among the components of the manufacturing sector, food products have shown about zero inflation this year. International price cycles, recessionary conditions and increased competition — have all played a part. International price cycles tend to effect edible oils, which have seen a deflation. Global edible oil prices are down. Consumers are also looking at the price-value equation closely. Driving this phenomenon is the emergence of regional brands in many categories of foods like oils and tea. This works in sectors where there is a large loose market alongside a packaged goods market. Typically, packaged goods players have been positioning themselves on a benchmark quality or benefit. Now regional producers are offering the benchmark quality at a lower premium. In the textile category, the inflation rate hovered at 0.4 per cent. Cotton textiles account for 53 per cent of this category and between April '99 and January '00, they reported a 0.3 per cent drop in prices. Inflation also dipped about 2.4 per cent in the case of manmade textiles, despite a surge in polyester prices. PFY prices are up 15 per cent compared to last year, in line with the upsurge in international prices. In the chemicals category, inflation ruled at 4 per cent between April '99 and January '00. A large part of this could be cattributed to the drugs & medicine section, which accounts for 15 per cent of this segment. Drug prices are up 24 per cent. Prices of either bulk drugs or formulations have increased 6-8 per cent. The prices of most other chemicals are driven by international commodity cycles, and were lower. Inflation in the metals and alloys segment hovered at 1.8 per cent between April '99 and January '00. This segment includes metals as well as products like structurals, pipes, castings and forgings. Base metals prices are driven by international cycles and have been in the doldrums for some time now. Prices of some metal products have also increased. For example, aluminium sheet prices are up 12 per cent, the prices of structurals are about 10.3 per cent higher. Machinery is a diverse category, contributing 11 per cent to manufactured products. In this group, prices moved up 1.2 per cent. This category includes products such as engines, refrigeration equipment, electrical machinery, wires & cables, batteries and home appliances. Competitive pressures have kept the inflation rate depressed in the cement and paper sectors. In '99-00, the cement sector saw rather healthy demand. However, producers were unable to raise prices due to capacity overhang. The paper sector is also languishing. This is largely due to a combination of two factors, namely domestic overcapacity and the international price cycle. The latter continues to remain unfavourable. Rubber goods have a 1.6 per cent weightage in the WPI. Their chief component is tyres. Tyre prices are weak in the wake of competition from cheap Korean imports. In the case of plastic products, prices are up for a few items, but the overall effect is still negative. The automobiles & parts category has a weightage of 2.4 per cent in the WPI. Between April ’99 and January ’00, inflation ruled at 4.2 per cent in this category. The increase may be attributed to components, where producers may have been able to increase prices, spurred by strong demand for automobiles. Overall, the Indian manufacturing sector is under more competitive pressures, both domestic and external. Categories contributing about 35 per cent of the WPI could be exposed to international competition. And, if one includes domestic competition in sectors like cement, consumer durables and automobiles too, the pricing power of a substantial part of the manufacturing basket could be affected by competitive pressures. Which direction will inflation take in the future? It is not possible to make an accurate forecast because for the primary goods category because this section is unpredictable. In four of the last 10 years, inflation in this category exceeded 10 per cent and only in the last two years has it stabilised at less than 5 per cent. So, if one goes by the law of probabilities, inflation in this category is likely to rise. Prices in the fuels category tend to rise religiously, and so inflation could hover at 8-10 per cent. International oil prices are expected to come off shortly, which could reduce pressure on this category. That leaves the manufacturing sector, the big bogey. A large part of this section is now aligned with global cycles. Indian customs rates are among the highest in the world. These have to come down. Internal competitive activity is only likely to increase in manufacturing as a whole. As seen in some key sectors like cement, TVs, automobiles etc, strong demand is no gaurantee to prices rising. Therefore, while demand revival should create conditions for manufacturing inflation to rise, it is likely that it may remain at 4-5 per cent levels in '00-01, where it has been for the last four years. Overall, therefore, the WPI should stay at 5-6 per cent for the next year. This will be a low for India.
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Fast Facts: - Inflation (WPI) is composed of Primary food articles; fuel group and manufacturing. - Inflation grew at less than 3% in 1990 and is expected to be low in the year 2000. |
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