A couple of days ago the Wholesale Price Index (WPI) inflation was released and it was much to dismay of the NDA Government. After an unexpected fall in April 2014 to 5.20%, WPI inflation rose to 6.01% in May 2014.

So what is pushing inflation up?
Well, it's the price of food articles and fuel & power which are weighing on inflation. Food inflation which has a weightage of 14.34% in WPI) rose to 9.50% in May 2014 (from 8.64% in the previous month) as prices of onions, potatoes, fruits and protein based items (such as such as egg, meat and fish) witnessed an increase. Likewise, fuel & power (which has weightage of 14.91% in WPI) too, rose to 10.53% in May 2014 (from 8.93% in the previous month) as prices of high speed diesel, petrol and electricity witnessed an increase.

While manufacturing inflation (which has a dominant weightage of 64.97% in WPI) also saw an increase to 3.55% in May 2014 (from 3.15% in the previous month), the up-move was rather mild on account of lull witnessed by industrial activity in the country.

And, has the NDA Government initiated any actions?
Yes.

Recognising the risk emanating from food inflation, Narendra Modi-led NDA Government has swung into action to rein in prices of at least essential commodities. The recently taken steps are:
 

• Imposed a Minimum Export Price (MEP) of U.S. $300 a tonne on onions and has also assured a similar step for potatoes to bring down the export of the commodity and augment domestic supply.
   
• The Centre has also advised states to freely allow movement of vegetables and fruits by delisting those from Agricultural Produce Market Committee (APMC) Act.
   
• A line of credit has also been announced to offer states to directly import pulses and edible oils to meet shortages. Furthermore, additional five million tonnes of rice will be released in the open market through states. In Delhi, the Government will procure onions for sale through Public Distribution System (PDS) and at Mother Dairy outlets.
   
• Importantly, the Centre has also advised states crack down on hoarders, amid apprehensions that stocks of food items were being withheld in anticipation of a sub-normal monsoon.
   

Can the aforesaid steps indeed help?
MEP is resorted to when there is significant increase in prices in the domestic market. So PersonalFN is of the view that the move of imposing MEP on onions and taking a similar move for potatoes would help cool inflation in these two commodities, as it is expected to have some impact of increasing domestic supplies. Likewise offloading five million tonnes of rice will also help cool prices with the expansion in supply. Similarly, announcing a line of credit for states to directly import pulses and edible oils to meet shortages, will also be of help. As far as delisting of vegetables and fruits from the AMPC Act is concerned, it would provide farmers the option of going either to the APMC or the market.

However, PersonalFN is of the view that while the Centre has also advised states to crack down on hoarders, the effectiveness of this valuable advice remains to be seen, especially in case of state Governments which are run by political party(s) other than the BJP or its allies in the NDA, where risk of hoarding could still exists. Also the impact on prices of actually delivery on account of the aforesaid steps yet remains to be seen.

The additional challenges...
The late onset of the monsoon and the IMD's official forecast of a sub-monsoon this year (due to 60-70% chances of an El-Nino phenomenon) pose a risk further to food inflation.

Likewise, the sectarian tensions in Iraq are escalating crude oil prices. Amid such a scenario, the impact on fuel & power inflation may also be felt, as diesel prices have been hiked in the recent past. Thus far the NDA Government has been continuing the previous Government's policy of partial deregulation of diesel and has hiked diesel prices by 50 paise per litre. But since the sectarian tensions in Iraq prevail and the impact is seen on crude oil prices, the NDA Government has not completely deregulated diesel prices so far. Nonetheless if the NDA Government decides to de-regulate diesel it could show a detriment impact on fuel & power inflation. You see, with diesel essentially being transport and industrial fuel, it could also show its impact on food inflation and manufacturing as well. It is noteworthy that crude oil comprises a dominant portion in India's import list, and a rise in crude prices would also have an impact on trade deficit, CAD, Indian rupee, and even fiscal deficit, as the Government would have to bear the increase in subsidy burden.

So while the steps taken by the Government to cool food prices are encouraging, PersonalFN believes, the macroeconomic aforementioned macroeconomic environment would was also pose a challenge for NDA Government and Reserve Bank of India (RBI) in managing inflationary pressures.

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