[Economic Survey] Ch4: Inflation- Trends in WPI, CPI, IIP & International market, Government reforms to combat price rise

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IAS Mock Interviews
  1. Prologue
  2. [Act 1] Theory recap
  3. [Act 2] WPI inflation trend: Survey points
  4. [Act 3] CPI inflation trend: Survey points
  5. [Act 4] IIP Trend: survey points
    1. Mining and Power
    2. Manufacturing
    3. 8 Core industries in IIP
  6. [Act 5] Trend in international market (2014-15)
  7. [Act 6] How can Government fight inflation?
  8. Appendix: Actual STUPID numbers WPI, CPI, IIP
    1. Consumer Food Price Indices (CFPI)
    2. IIP data growth compared to previous year
    3. IIP – over two years
    4. IIP data compared to BASE year

Prologue

Chapter 4: Prices and Monetary Management. Three subparts

  • Monetary management, measures of money supply, Urjit Patel
  • Indexes’ Theory: WPI, CPI, IIP, Services index and others
  • Indexes’ Current: Survey observations on WPI, CPI & IIP, How to combat inflation.

Wait…what happened to remaining chapters?

  • Ch. 8 to 13 published as articles.
  • Chapter 1 to 3; 5 to 7 available as powerpoint and videos. (Will release them as articles after prelims and its “unofficial” answerkey.)

[Act 1] Theory recap

Make sure, you’ve read earlier part for the theory. Overall gist can be summarized in following table:

Compare-WPI CPI IIP

QUESTIONWPICPIIIP
HOW?Lespeyre’s formulasamesame
WHO?Economic advisorCSOCSO
WHEN?weekly & monthlymonthlymonthly
WHERE they get data?ministries, dept., industriesNSSO and Postal workersministries, dept, bodies
Components3: MFG > Primary > Fuel5 categories3: MFG > Mining >electricity
typesonly one WPIRural, urban, combinedSector wise and goods Usage wise.
items676682
base year200420102004
COREnon-food manufacturingheadline – (food+fuel)8 industries

Now, what does Economic Survey Chapter 4 say about these indexes?

[Act 2] WPI inflation trend: Survey points

  • WPI food inflation has remained persistently high during 2013-14,
  • Peak: 11.95% in 2013-Q3
  • Two reason: high inflation in food + fuel.
  • Food: high inflation in cereals, fruits, vegetables, and eggs, fish and meat. Reason: structural factors (APMC, hoarding) and seasonal factors. + juntaa’s income increased hence buying more protein.
  • Fuel inflation has remained in double digits, because
  1. Rupee weakened against dollar after rumors of Fed Tapering in 2013.
  2. Global crude prices became volatile after geopolitical crisis in Iraq, Syria, Ukraine.
  3. Oil marketing companies are allowed to revise retail prices of diesel upto 50 paise per month.
  4. In many states, Electricity tariffs were revised, and increased.

Headline vs Core WPI inflation

Headline WPI
  • All components viz. primary, fuel and mfg.
Core WPI inflation
  • Only WPI of Nonfood manufacturing industries.
  • Headline WPI MINUS primary MINUS fuel MINUS food-mfg. industries
  • Core WPI inflation also increased because inflationary pressure within the chemicals, machinery and textile groups.
  • HSBC’s purchasing managers index (PMI) also showing correlation with WPI core inflation.
  • Therefore looking at PMI trend, survey believes, that core-WPI will also increase in upcoming months.

[Act 3] CPI inflation trend: Survey points

Headline CPI
  • All components. Here high inflation due to food items
Core CPI
  • Core CPI =Headline CPI MINUS food and fuel components.
  • Here, high inflation due to services-led components such as medical, education, household requisites.
  • Because food inflation, fuel inflation => demand for higher wages => service components become expensive e.g. doctor, tuition teacher.
Housing
  • Housing is a component in CPI. Data shows that housing inflation has declined in recent months.
  • National housing bank (NHB)’s RESIDEX gives us a better picture. According to RESIDEX- overall price increased for all cities. Except Kochi and Hyderabad.

Economic Survey observation for 2013-14:

  • CPI inflation remained close to double digits during a large part of the year
  • Within CPI, Rural CPI inflation has been higher than urban
  • ~50% of inflation in CPI is because food. (For last three years).
  • Within that, 80% of inflation coming from vegetables, cereals and protein items.

[Act 4] IIP Trend: survey points

  • For last two years, Industrial sector has lost momentum due to supply-side and demand-side constraints.
  • Slowdown in mining and manufacturing activity.
  • Slowdown in private investment, gross fix capital formation.

Now let’s check a few specific industries within IIP

Mining and Power

Declined for the third successive year because
Coal
  • Contributes ~40% of mineral output
  • Hardly 0.7% increase due to environment clearance issues.
Natural gas
  • KG-6 production down.
  • Decline: -13%
Iron
  • SC ban.
  • Later, ban lifted but global demand is low.
Power generation
  • Slight increase because of hydropower sector.

Manufacturing

Manufacturing = ~60% of industrial GDP. But slowed down because

  1. Higher bank interest
  2. Infrastructure bottlenecks
  3. Low demand- both domestic and foreign
  4. Inflation=  input costs increased.
  5. Automobile sector: Juntaa’s per capita income is low. So can’t grow much even if we want.
  6. Consumer durables sales declined. Especially, gems and jewellery, passenger cars, colour TV sets, and telephone instruments.
  7. Globally, one of the fastest growing manufacturing sectors= electronics. But we don’t have technological edge like S.Korea, China, Apple or Samsung.

8 Core industries in IIP

  • Within IIP, following 8 are core industries because they’ve impact on almost all other economic activities:
  • coal, fertilizer, electricity, crude oil, natural gas, refinery products, steel, and cement.
  • Within that negative growth in: natural gas, crude oil.
  • Since construction activity declined => Steel-cement demand also down => production decline.
  • Overall, very low growth in 8-core industries

[Act 5] Trend in international market (2014-15)

  • Gold price will remain flat
  • Other Commodity market prices will either decline or remain flat.
  • Fuel supply should increase and price should decline.
  • Copper price will decline because Chinese demand will decline.
IMF’s World economic outlook: INFLATION
CountryAdvancedEconomiesEmergingDeveloping
20131.45.8
20141.55.5
20151.65.2
OverallPrice risefall

As per above IMF-projections, commodity prices should fall, and WPI (headline) should decreased in 2014 and 2015. But there are challenges:

More inflation inIF following happens
Food
  • Below normal monsoon due to El-Nino. 70% probability that El nino will occur. Rainfall will reduce to 93% of the average. (as per Meteorological Department)
Fuel
  • Higher crude oil prices due to geo-political situation in the Middle East. (Iraq-ISIS, Israel-Palestine).
  • Rupee weakens further, because of Fed tapering.

[Act 6] How can Government fight inflation?

Economic Survey hints following reforms:

  1. Cut down Fiscal deficit, as per time-bound targets under the Fiscal Responsibility and Budget Management (FRBM) Act.
  2. Deregulate diesel prices, power–sector reforms, and generally the move from administered to market-determined prices.
  3. This will raise inflation in short term but in long term, it’ll reduce fiscal deficit and thereby reduce inflation.
  4. MNREGA doesn’t improve productivity of the agricultural sector commensurately.
  5. Raising MNREGA wages => shortage of farm labour => input cost increased, food supply decreased => food inflation.
  6. Therefore, MNREGA should be restructured to create productive assets
  7. Agriculture: MSP should be linked cost of production. FCI’s Procurement should not be open-ended. Bring UREA under NBS scheme. Give Fertilizer Subsidy to farmers instead of companies.
  8. Some stages charge ~15% mandi tax, and use that money to pay bonus above MSP to farmer (for vote bank politics). This practice must be stopped.
  9. FCI should release grains in market to soften food inflation.
  10. Government should reduce restrictions on agriculture exports.
  11. Reform APMC Acts
  12. Immediately take out fruits and vegetables from purview of the APMC Acts immediately.
  13. How can RBI fight inflation? Ans. Urjit Patel Committee.

Appendix: Actual numbers WPI, CPI, IIP

Numbers not important but “TREND” is

WPI CPI monthly trend 2013-14

WPI and CPI yearly trend
yearWPICPI combined (Rural +urban)
2012-137.3510.21
2013-145.989.49

 

WPI and CPI monthly trend
MonthWPICPI (combined)
Jun-135.169.87
Jul-135.859.64
Aug-136.999.52
Sep-137.059.84
Oct-137.2410.17
Nov-137.5211.16
Dec-136.49.87
Jan-145.118.79
Feb-145.038.03
Mar-1468.31
Apr-145.558.59
May-146.018.28
Jun-145.437.46
  • This is “inflation” corresponding to previous year. Example- In June-2014 the CPI was 7.46% higher than what it was in June 2013.
  • and in June 2013, CPI was 9.87% higher than what it was in June 2012 and so on…
  • If you DIRECTLY compared to “BASE YEAR” 2010, then CPI for July 2014 is 149.6! Meaning prices ~50% higher than what they were at 2010 (Base price 100)

Consumer Food Price Indices (CFPI)

yearRuralUrbanCombd.
Jul’1310.6612.5211.22
Jul’149.858.459.36

IIP data growth compared to previous year

June 2013-1.8
June 20143.4
  • Interpretation: IN June 2014, the production “Quantity” increased by 3.4 compared to June 2013’s level. AND in June 2013, production “quantity” declined by -1.8% compared to June 2012 and so on.

IIP – over two years

IIP sectors2012-132013-14
Mining2.30.6
Manufacturing1.30.8
Electricity46.1
overall1.1-0.1
IIP-goods Usage wise20122013-14
Basic Goods2.42.1
Consumer non-durable2.85
Intermediate Goods1.63.1
Capital Goods-6-3.6
Consumer durable2-12.2
overall1.1-0.1
  • Interpretation: compared to consumer durables produced in 2012, there was -12.2% decline in 2013.
  • this doesn’t mean decline in “Price”, it means decline in “production quantity”

IIP data compared to BASE year

Month20132014
Apr166.5172.2
May166174.3
Jun164.9170.5
Jul171.4
Aug165.4
Sep167.5
Oct169.6
Nov163.6
Dec179.5
Jan184
Feb172.7
March193.3

Interpretation: if in 2004, industrial production was 100 “units” then in June 2014, it increased to 170.5 units. i.e. 70.5% increased. so here “positive” but compared to last year, overall mostly negative. (Observe previous table).

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24 Comments on “[Economic Survey] Ch4: Inflation- Trends in WPI, CPI, IIP & International market, Government reforms to combat price rise”

  1. Thank u so much sir

  2. sir u r just awsome so hard workinf 4 us thankj u so much sir

  3. really good work sir………previously i’m not able to solve economy questions……but after seeing ur articles itz bit easy task for me………..

  4. Thanks Sir, nice inf before exams.

  5. I read that inflation is calculated on point to point basis, can anybody explain it and about it’s advantages

    1. As you know that WPI is published weekly and CPI is published monthly. From my understanding, point-to-point means the price “level” difference over two specific “periods”. For example, if the WPI for the week ending Aug 21, 2014 is 8% then it means that the WPI is higher by 8% compared to that in the week ending Aug 21, 2013. Similarly, in case of CPI, if it is 10% in the month ending August 2014, then point-to-point inflation means that the price index has risen by 10% compared to the CPI in August 2013.
      It is only an indicator of price “level” but it does not necessarily mean that the prices have actually gone up over that period. For example, WPI may have moved up because the prices fell in the corresponding period of the previous year. Hence, a more accurate picture is given by average annual inflation rate rather than point-to-point rate.

  6. Thanks alot Sir but I want to add one thing in act 5 you said that prices ll decline but In case of decline in rate of inflation prices ll not reduce as long as inflation rate is positive

  7. ultimate and excellent work down……….no words to appreciate u…………….u r really master of digital knowledge delivery……….thanks lot……………..

  8. Very Very Useful Info.. Thanks

  9. @Mrunal :
    HDFC’s purchasing managers index (PMI)

    I think it should be HSBC..

  10. core inflation wpi i m confused plz anyone can explain

  11. thnks sir very nicely explained

  12. THANKS……………………

  13. Mrunal Sir Images on the page are Not displaying Please check

  14. Dear Mrunal Sir,

    Please mention the dates on the articles as was being mentioned earlier. It is not possible to follow your site every day. Date is the best marker by which one can remember that last time till which article he read and from where to start. Otherwise reading the articles by opening one by one would be a tedious job. I hope u understand the concern.

    Thanks

  15. Hi Mrunal,

    Since overall IIP has to be between lowest and highest values, I started checking data from CSO tables. U have missed out on a few negative signs. Donno if you have posted corrections later, still sending this for everyone’s benefit. Kindly correct on page too.

    IIP sectors 2012-13 2013-14

    Mining -2.3 -0.6
    Manufacturing 1.3 -0.8
    Electricity 4 6.1

    Overall 1.1 -0.1

    Keep up with your Gift of Writing so Lucidly. Amazing Work !!

  16. Need material for demand pull and cost push inflation

  17. sir kindly suggest books for NABARD phase II as i dont have much time kindly help me what are the topics which i need to stress more in syallabus
    exam is on 11 please reply
    waiting for your golden reply

  18. Sir can you provide me notes regarding GDP,NNP,GNP and NDP. waiting for your reply

  19. Thank you sir, economy subject is now easy to understand.

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