Nov wholesale prices remain in deflation zone for second month

Understanding the Wholesale Price Index (WPI) and its movements is crucial for competitive exam aspirants, as it offers a deep insight into the health of a nation's economy, particularly from the producer's perspective. The recent news of WPI remaining in the deflationary zone for November 2023, marking the second consecutive month with a fall of 0.3 percent, presents a nuanced picture of India's economic landscape, especially when contrasted with a slight increase in retail inflation (Consumer Price Index or CPI).

**Background Context: What is WPI?**

The Wholesale Price Index (WPI) measures the average change in the prices of commodities at the wholesale level, i.e., before they reach the retail consumer. It is compiled and released by the Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry. Unlike CPI, which tracks consumer-level prices, WPI primarily captures price changes in goods traded between businesses, serving as a key indicator of cost-push inflation. Its basket includes manufactured products (64.23% weight), primary articles (22.62%), and fuel & power (13.15%). For many years, WPI was India's headline inflation measure, but since 2014, the Reserve Bank of India (RBI) has officially adopted CPI as its primary inflation target.

**What Happened?**

In November 2023, the WPI registered a fall of 0.3 percent, following a similar trend in October. This means that, on average, wholesale prices were 0.3 percent cheaper than they were in November 2022. The primary drivers for this deflationary trend were a decline in prices of key commodities such as food articles, mineral oils, crude petroleum, and natural gas. These are essential inputs for various industries, and their cheaper cost translates into lower input costs for manufacturers. Interestingly, this WPI deflation occurred even as retail inflation, measured by the CPI, saw a slight increase, highlighting a divergence between producer and consumer price dynamics.

**Key Stakeholders Involved:**

1. **Ministry of Commerce and Industry (DPIIT):** This government body is responsible for the compilation and release of WPI data, providing crucial economic insights to policymakers and the public.

2. **Reserve Bank of India (RBI):** Although CPI is its primary target, the RBI closely monitors WPI trends. Changes in WPI can signal future movements in CPI, especially if cost-push factors are at play. WPI data helps the Monetary Policy Committee (MPC) in its assessment of the overall inflation trajectory and economic health.

3. **Producers/Manufacturers:** These are the most directly impacted stakeholders. Lower WPI implies reduced input costs, which can improve profit margins or allow them to offer products at competitive prices. Conversely, if output prices fall too much, it can squeeze margins.

4. **Government:** Uses WPI data for economic planning, budgetary allocations, and assessing the impact of various policies on industrial costs and overall price stability.

5. **Consumers:** While not directly reflected in WPI, sustained WPI trends eventually trickle down to consumer prices, affecting their purchasing power.

**Why This Matters for India:**

This WPI deflation is significant for several reasons. For producers, falling input costs can provide a much-needed respite, potentially boosting manufacturing output and overall industrial growth. However, persistent deflation can also signal weak demand or oversupply, which might deter fresh investments. For the economy at large, WPI deflation, especially when coupled with rising CPI, points to a complex inflationary environment. It suggests that while producers might be facing lower costs, these benefits are not fully translating into lower retail prices, possibly due to supply chain inefficiencies, higher service costs, or robust consumer demand in specific sectors. This divergence poses a challenge for monetary policy, as the RBI has to balance controlling consumer inflation (CPI) with ensuring adequate liquidity and support for economic growth, where WPI trends offer valuable forward-looking cues on cost pressures.

**Historical Context and Broader Themes:**

India has historically grappled with both high inflation and, occasionally, deflationary pressures. The shift to an inflation-targeting framework, formally adopted in 2016 following the **Monetary Policy Framework Agreement** between the Government of India and the RBI, underscores the importance of price stability. This framework mandates the RBI to maintain retail inflation (CPI) within a band of 4% (+/- 2%). The legal basis for this is found in the **Reserve Bank of India Act, 1934, specifically Section 45ZA**, which empowers the central government to determine the inflation target in consultation with the RBI and establishes the Monetary Policy Committee (MPC) to achieve this target. While WPI is not the target, its behaviour is a critical input to the MPC's deliberations. Periods of WPI deflation, particularly due to falling global commodity prices (like crude oil), have often provided a cushion against higher CPI in the past.

**Future Implications:**

Experts suggest that WPI may soon return to inflation territory as 'base effects' weaken. Base effect refers to the impact of the previous year's high or low inflation rate on the calculation of the current year's inflation. If prices were low in the corresponding month of the previous year, even a small increase in current prices can lead to a higher inflation rate. Conversely, if prices were high, it becomes harder to show a high current inflation rate. As the low base of commodity prices from late 2022 and early 2023 fades, WPI could see an uptick. Furthermore, global geopolitical events and supply-side disruptions, particularly affecting crude petroleum and natural gas, could reverse the current trend. The RBI will continue to monitor both WPI and CPI closely, along with other high-frequency indicators, to calibrate its monetary policy stance, balancing growth impulses with inflation management. This careful balancing act is central to ensuring India's economic stability and sustainable development, aligning with the broader goal of good governance and economic welfare.