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WPI: Still in the red category

  The poor are more vulnerable to the inflationary squeeze on incomes. The government must keep this in mind while making policies

The wholesale price index (WPI) grew to 14.5% year-on-year in March, as per the Union ministry of industry and commerce. The latest data makes 2021-22 the first fiscal year since 2011-12 (when the current WPI series starts) when wholesale inflation was in double digits. The Consumer Price Index (CPI) — the benchmark inflation measure in the economy — has also stayed above the upper limit of the Reserve Bank of India (RBI)’s tolerance zone of 6% in the past three months. Commodity prices are unlikely to come down soon. Crude oil prices continue to remain significantly above the $100-mark despite the demand shock from the fresh Covid-19 outbreak in China. To be sure, the pandemic situation in China is not an unambiguous blessing on the inflation front. While it has helped control fuel prices to some extent, the disruption of global supply chains due to the lockdown in China will lead to more shortages and stoke inflation further. The fuel inflation sub-category was high in India’s March WPI data. Now, one will have to brace for the cascading effects of the fuel price hike on other items. Global food prices are expected to move further north due to the disruption of supplies from the Ukraine-Russia region.

While the government is claiming a record agricultural production this year, many experts point out that wheat yields might have suffered due to an early onset of summer. If this shortage is significant, food inflation could experience additional tailwinds in the country. What does this inflationary outlook entail for the economy? Not everything is bad about it. Higher inflation is likely to boost to nominal incomes and, hence, government revenues. This is also likely to cushion export earnings, even if volume growth comes down in what is likely to be a subdued year for the global economy. Moreover, higher food prices are likely to usher in good times for a section of farmers. But the downsides are far from insignificant. India has massive income inequality, both among people and firms. The ability to pass on the inflationary burden — firms to consumers and employees to employers — is also a function of relative economic power. This means the poor are more vulnerable to the inflationary squeeze on incomes. The government must keep this in mind while making policies.
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