New Delhi: India’s wholesale prices fell the least in 12 weeks, suggesting that inflation may soon return to Asia’s third largest economy.
The benchmark Wholesale Price Index (WPI) dropped 0.21% in the week to 22 August from a year earlier, after retreating 0.95% in the previous week, the commerce ministry said in New Delhi on Thursday. That compared with the median forecast of a 0.85% fall in a Bloomberg survey of 14 economists.
Inflation will shortly turn positive and may accelerate past the 4-5% comfort zone by March as a weak monsoon reduces harvests and puts pressure on food prices, the Planning Commission, India’s top economic advisory body headed by Prime Minister Manmohan Singh, said on 1 September.
“The drought has significantly hurt summer crops and chances of poor winter crops are also high amid still-insufficient rainfalls,” said Sherman Chan, an economist at Moody’s Economy.com in Sydney. “As the supply of farm output falls, prices of food items are bound to surge.”
Graphics: Paras Jain / Mint
The weakest monsoon in at least seven years has caused drought in 278 of India’s 626 districts this year, damaging crops including sugar cane, rice and oilseeds.
The summer harvest will decline by one-fifth and the country may import food items such as edible oils and lentils to meet any deficit, finance minister Pranab Mukherjee said last month.
Higher spending by the government to import commodities to improve domestic supply conditions could increase pressure on the fiscal situation, the central bank said in a 27 August report.
A deficient monsoon may not only put pressure on food prices, but also increase the demand for subsidies, it said.
India’s budget shortfall may widen by as much as 0.3% from the government’s forecast in the year to March as the government spends more to limit the impact of a drought, said Chetan Ahya, an economist at Morgan Stanley. The government estimates the deficit at 6.8% of gross domestic product.
Wholesale price inflation may accelerate to as much as 8% by March, said Robert Prior-Wandesforde, senior Asian economist at HSBC Holdings Plc in Singapore. “There is a sizeable risk that food price inflation will rise further from here, potentially squeezing real personal incomes and consumption,” he said.
Food costs as reflected in the nation’s Consumer Price Indexes are already increasing at a rapid pace.
Consumer prices paid by farm workers jumped 12.9% in July from a year earlier. Prices paid by rural workers rose 12.67% and consumer prices paid by industrial workers climbed 11.89%.
India has four consumer-price gauges and uses the WPI as the benchmark because the other inflation measures don’t capture the aggregate price picture.
Subdued economic growth and emerging inflation risks pose a complex dilemma for policymakers, the Reserve Bank of India (RBI) said on 27 August.
Central bank governor D. Subbarao cut benchmark interest rates six times from October to April to unprecedented lows. On 28 July, he left the reverse-repurchase rate unchanged at 3.25% and kept the repurchase rate at 4.75%, and said RBI may have to reverse its expansionary measures to subdue inflation.
“As inflation is primarily driven by food prices thus far, monetary tightening, which will have an outright contractionary effect, may not be the most effective way to contain price pressures,” said Chan from Moody’s. “Policymakers should focus on ensuring sufficient food supply and reasonable pricing.”
The India Meteorological Department on 10 August lowered its monsoon forecast for a second time this season, saying showers between June and September will be 13% below average, compared with a 75% shortfall estimated in June.
WPI published on Thursday may be revised in two months, after the government receives additional data.
The commerce ministry revised the rate for the week ended 27 June to a drop of 1.09% from a decline of 1.55%.