The consumer price index (CPI) inflation jumped to 5.77% in June 2016 compared with 4.83% in March 2016. CPI inflation has now jumped by 94 basis points in a span of three months. For any country that aspires for inflation targeting this does not augur well. However hidden behind such number rhetoric, the fact is that the current episode of retail inflation trajectory is purely food driven-unlike earlier ones and herein lies the policy conundrum, says a research report.
State Bank of India (SBI) in its Ecowrap report says, "For the three month period, the weighted contribution of vegetables in overall CPI inflation has increased from 1% in March to 17% in June. Though it is not as frightening, as it was in FY14, when the contribution of vegetables increased to a staggering 38% in November 2013 from 7% in March 2013, the situation on the ground does look worrisome. Vegetables are thus the undoubted Sultan of CPI."
During June 2016, the prices of vegetables increased 14.7% with some specific commodities like potato, green chillies and tomato contributing 64% of such increase since March. Price of pulses continues to abate to 26.86% from a high of 46.08% in November 2015.
The most satisfying aspect is perhaps the non-food component -core CPI part. Core CPI has maintained an average of 4.5% during January 2015 till June 2016. The weighted contribution of core CPI in headline has also remained stationary at 36% during the same period. Service CPI contribution has declined by 310 bps over the 12 month period ended June 2016. This has been made possible by significant disinflationary impetus in components like medical, education and even clothing. The report says, "The question is how far can we dis-inflate in items of necessary consumption (like education) in a country that boasts of reaping its demographic dividends?"
"Going forward, CPI numbers may continue to be around the current levels before start decelerating from August onwards. The 5% inflation target for January 2017 looks a little bit challenging as off now," it added.
Monsoon, which was a late starter this year picked its pace and after a deficit of 11% during June now fares at surplus of 2%. The turnaround was largely recorded in North-West and Central region. East and North-East India were in huge deficit and will remain in deficit mode as predicted by IMD. Though the monsoon will cover entire country by Wednesday, the huge deficit of 57% in Gujarat is a matter of worry. Of all the 36 sub-divisions, 30 sub-divisions received excess or normal rainfall, which covered almost 83% of the country, and only six sub-divisions received deficit or scanty rainfall.
"Though the Kharif sowing was marginally less than the last year till now (406 lakh hectare till 8th July compared to 432 lakh hectare last year), it will definitely increase going forward. However, from an agricultural perspective, it is the rains in July and August - during the crucial vegetative and early reproductive growth stages of the crop - that really matters," SBI said in the note.
Regarding Index of Industrial Production (IIP), the numbers will continue to remain weak. The report says, "In terms of June quarter results, we foresee sectors such as Auto, IT, Pharma, FMCG, Cement to outperform other sectors in terms of revenue growth. Steel, though undergoing tough times, is likely to face easing pressure on pricing. A low interest rate for this capital intensive sector is only going to help its bottom line, but a positive firm trend in the current quarter appears to be away."
"Business cycle mirrors the timetable of the election cycle. Incumbent governments, use restrictive policies early in their elected tenure raising unemployment to reduce inflation. At a later date, as election approaches, the policy priorities change towards employment generation. In this respect, this highlights the time inconsistency behaviour of any Government. Hence don’t be surprised if future policies become more flexible and continue to be accommodative," the Ecowrap report concluded.
Meanwhile according to a report from IANS, prices of most vegetables and fruits crossed Rs100 a kg on Wednesday coupled with severe shortages and poor quality as a strike by commission agents crippled wholesale and retail markets in and around Mumbai.
Virtually no vegetable of daily use was available for less than Rs100 - or more than four times the regular rates - as supplies to the wholesale markets of Agriculture Produce Marketing Committee (APMC) at Vashi in Navi Mumbai dropped to a trickle on the third day of the indefinite strike.
Leading activist Mohan Gurnani, a former president of the powerful Federation of Associations of Maharashtra (FAM), said that against the daily average of 600 trucks, the supplies had fallen to less than 10% - or around 50 trucks a day since Tuesday.
"The agents have been left with no option. Though the strike has hit the farmers, commission agents (arhatiyas), retailers and consumers, the government move would actually benefit the big companies engaged in agro-marketing," Gurnani said.
The Maharashtra government promulgated an Ordinance on Tuesday amending the APMC Act, 1963, deregulating vegetables and fruits, to enable farmers get better remuneration and consumers cheaper produce.
Simultaneously, the government made efforts to procure adequate supplies from different parts of the state to cater to the demand in Mumbai, Thane, Navi Mumbai and other areas where prices have hit the roof.
Associations of hoteliers and restaurants toyed with the idea of dropping most vegetables from their menus if the situation failed to improve soon.
Non-vegetarians too were hit hard as prices of chicken, mutton, fish and eggs shot up: eggs from Rs50 to Rs100 a dozen.
The representatives of commission agents have been called for a meeting by the government in an effort to sort out their grievances, mainly pertaining to the move to stop them charging eight percent commission from farmers.
Since commission is the only source of their earnings, the 'arhatiyas' and wholesalers have gone on a protest strike.
In some parts of Mumbai, tomatoes sold at Rs180 a kg, cucumber and brinjals at Rs120 a kg, capsicum at Rs110 a kg, and cauliflowers and cabbages at Rs150 a kg.