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:

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

• 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

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

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.

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

[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

• 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)

IIP data growth compared to previous year

• 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

• 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

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).