WPI looks poised to turn inflationary

Uptick in food prices expected although there is no clarity on the rate and duration of the increase

Price trends in food articles, as measured by the wholesale price index (WPI), remained in negative territory in September for a third straight month.

This implies the prices of major kharif pulses — along with fruit and vegetables — fell sharply during the month compared to September last year.

However, there might be an uptick in food prices, turning WPI trends from deflation to inflation — though there is not much clarity yet on the rate and duration of the uptick.

The rate of WPI-based deflation in food articles came down from 4.04 per cent year-on-year in August to 0.21 per cent in September this year, mainly on account of an upward movement in vegetable and fruit prices in these two months.

The deflation rate in vegetable prices narrowed to 3.83 per cent from 20.18 per cent in August, while that in fruit prices declined to 7.35 per cent in September from 16.40 per cent the previous month.

In pulses, another big item that has pulled WPI growth for food articles into negative territory, the deflation rate in September widened to 18.14 per cent from 14.26 per cent in August.

The prices of most kharif pulses, along with oilseeds and cereals, are ruling much below their state-mandated minimum support price (MSP) for the 201819 kharif season. Clearly, while the deflation rate in fruit and vegetables is narrowing, the rate in pulses is not showing much change.

A growing number of experts, market watchers and economists say WPI-based inflation in food articles might show an upward movement now. However, the rate and duration of the inflation rate remain unclear. It is unclear whether any rise in the WPI for food articles could turn into gains for farmers, who have been reeling from the impact of consecutive years of low prices. This is because evidence shows any benefit of increase in food prices does not reach farmers because of fragmentation in markets.

In most cases, it is wholesalers and middlemen who garner the benefits of price increase. So, even when the gap between retail and wholesale rates widens to more than 50 per cent in some cases, farmers remain in distress.

In India, as far as food inflation is concerned, things can change in a matter of weeks. A price spike in one or two food items could push food inflation numbers from the benign levels at present, said Aditi Nayar, principal economist, Icra.

According to experts, much of any rise in the WPI will also depend on how the government’s expanded procurement of non-wheat and rice commodities under the Prime Minister Annadata Aay SanraksHan Abhiyan (PM-ASHAA) pans out.

The Centre’s latest guidelines on the scheme do not provide for a support of more than 25 per cent of production under all its three components — the Price Support Scheme (PSS), Price Deficiency Payment Scheme (PDPS), and pilots on the involvement of the private sector in procurement.

The latest report by the Commission for Agricultural Costs and Prices (CACP) for 2019-20 rabi marketing season shows that despite expanded procurement in the past few years, less than 60 per cent of farmers growing the crop have benefited from operations.

“WPI growth in food articles is in for a slight uptick in the coming months on the back of a weak base and also because the government’s proposed procurement drive. The extent of the increase will need to be seen,” CRISIL Chief Economist D K Joshi told Business Standard. CARE Ratings Chief Economist Madan Sabnavis, however, said food prices would rise in the coming months, and a big reason for that would be a rise in vegetable rates.

“The Solvent Extractors Association has lowered the 2018-19 groundnut production by almost 30 per cent, while the production of urad is also expected to be less. Also, there would be some impact of MSP procurement in prices. All of these could turn negative WPI growth into positive in the next 2-3 months,” Sabnavis said.

The Monetary Policy Committee (MPC) has noted that the outlook for food inflation is expected to be benign, although the impact of the increase in the minimum support prices announced in July remains uncertain.