Inflation under check in 2015; Kitchen staples beg to differ

Inflation under check in 2015; Kitchen staples beg to differ
When it comes to inflation, the year 2015 has shown that the macroeconomic datapoints may not always show the real picture and the cases in point relate to quite a few kitchen staples such as potato, onions and pulses.

For records, the Consumer Price Inflation has remained well under control hovering in the range of 3.66-5.4 per cent so far in 2015 (RPT) 2015, while the industry chambers and some other experts are hopeful that it would keep below 6 per cent mark in the New Year -- a target set by the Reserve Bank.

However, the consumers saw an altogether different story in 2015 (RPT) 2015 when they went to the shops to purchase some staple grocery and vegetable items for a good part of the year.

While onion prices again brought tears to the eyes of consumers, prices of tur dal touched record high levels above Rs 200 a kilogram.

Another dataset, the Wholesale Price Index (WPI) based inflation in fact stayed in the negative zone for the entire year, meaning the wholesale prices actually fell and there was no inflation at all.

While it entered the negative zone in November 2014, the WPI inflation stood at (-)3.8 per cent in October 2015.

On the future datapoints, the industry chambers expect the prices to stabilise in the New Year although WPI may come back to the positive territory.

"During 2016, prices are likely to stabilise as industries continue to operate below full capacity. With industrial prices no longer falling, WPI inflation is likely to rise to positive territory while CPI inflation will likely remain in a band of 5-5.5 per cent," CII Director General Chandrajit Banerjee said.

"RBI's target of 6 per cent by January 2016 will be easily met. In fact, inflation is likely to moderate from current levels as measures are taken to moderate the prices of pulses which had shot up on account of deficient rains", he added.

International crude oil prices, which plunged to historic lows on a supply glut during the year, helped India reduce its oil imports bill and consequently commodities' transport cost.
RBI has however cautioned that while oil prices, barring geopolitical shocks, are expected to remain benign for a few more quarters, the uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance.

Industry body Ficci said India has been experiencing a phase of 'disinflation' given the plunge in crude oil prices and prices of other commodities and raw material and this trend is expected to continue over the near term.

"At the same time, increase has been noted in prices of agricultural commodities like pulses, edible oil, for which the government is taking appropriate action. Thus, inflation in near term is likely to remain within the RBI target," Ficci said.

Despite these favouring factors, India battled weather-related woes as the country saw two straight years of deficient monsoons in 2014 and 2015.

Deficient rains during the July-September Monsoon this year is likely to impact the rabi or winter crops, which will be harvested by March-end, as adequate soil moisture is important for growth of winter crops such as wheat, mustard, oil-seeds besides some varieties of pulses.

Almost 60 per cent of the crop in the country is rain- dependent, while the rest is well irrigated.

"The common man will continue to pay lower prices on fuel and transportation, although further declines are unlikely. The behavior of food prices will be uncertain as supply shortages could lead to sporadic increases in the prices of specific items," CII's Banerjee said.

According to an RBI expert group, global commodity prices continue to impart some disinflationary momentum, but there are some upside risks to inflation from internal factors such as negative monsoon shocks, binding supply side constraints, government consumption shocks due to Seventh Pay Commission Award.

"Tax collections, both direct and indirect tax are an important source of revenue for the government that is utilised for various purposes... It is to be ensured that undue pressure is not put on the existing set of tax payers, which adversely impacts their savings and consumption," said Vikas Vasal, Partner–Tax, KPMG in India.

"Any additional tax or levy especially on the indirect taxes like VAT or services tax impacts the ultimate consumer, as the burden of these taxes is generally passed on to the consumer," he added.

Both Ficci and CII have suggested to the government to address the supply chain bottlenecks by beefing up the post-harvest handling and distribution infrastructure and making Public Distribution System (PDS) efficient.

This year, the government and the RBI also signed a Monetary Policy Framework agreement with the objective maintaining price stability, commensurate with the objective of growth.

As per the agreement, RBI would set the policy interest rates and would aim to bring inflation below 6 per cent by January 2016 and within a band of 4 per cent with (+/-) 2 percent for 2016-17 and all subsequent years.

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