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Prices and Monetary Mgmt 2011-12

Prices and Monetary Mgmt 2011-12

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Published by bette_ruffles
A detailed look into the Prices and Monetary Management outlined in Financial Budget 2012. B.Com, BBA, BBM, PGDMA, MBA (finance) students will find this useful.
A detailed look into the Prices and Monetary Management outlined in Financial Budget 2012. B.Com, BBA, BBM, PGDMA, MBA (finance) students will find this useful.

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Published by: bette_ruffles on Mar 21, 2012
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Prices and MonetaryManagement
holesale price index (WPI) inflation, after remaining in an elevated zone at over9 per cent through the year, has been falling sharply since December 2011, aidedby lower food prices, a global economic slowdown, and the impact of nearly two years of domestic monetary policy tightening and other measures put in place bythe government. Monetary policy remained focused on controlling inflation andanchoring inflationary expectations, with 13 adjustments in policy rates since March2010, which has slowed growth. These effects, coupled with a favourable base effectin prices and continued global slowdown, are expected to moderate inflation toaround 6.5 to 7.0 per cent by March 2012; inflation is expected to come down further during 2012-13. The global economy witnessed fresh spells of crisis during2011-12, with domestic business and consumer confidence dampening on the backof the deepening sovereign debt crisis in Europe. Global commodity prices, particularly those of food and metals, softened from high levels, even as crude oil prices remain elevated and are a major source of uncertainty and risk. All emergingand developing economies (EDEs) witnessed higher inflationary pressures withconsumer price inflation for EDEs rising to 7.2 per cent for 2011, while that foradvanced economies (AEs) was 2.7 per cent. Looking ahead, vigilance is called forin getting back to a low-inflation/sustained high-growth path in India, by renewed focus on supply-side measures and improved fiscal consolidation, including stepped-up regular adjustments in domestic energy prices. High levels of food stocks and producer responses to higher protein and other food prices should help maintainoverall price stability ahead.
4.2Headline year-on-year WPI inflation afteremaining persistently high over the past two yearshas started to show signs of moderation lately.Financial year 2011-12 started with a headlineinflation of 9.7 per cent, which briefly touched doubledigits in September 2011 before coming down to6.6 per cent in January 2012. Consumer priceinflation (CPI) for the major indices declined to below7 per cent in December 2011, and fell further inJanuary 2012 (Table 4.1).4.3Headline WPI inflation remained relativelysticky at around 9 per cent during the calender year 2011.The factors contributing to this situation andtheir relative importance have, however, beenchanging over time. Some of the contributory factorsduring this period include (a) higher primary articlesprices driven by vegetables, eggs, meat, and fishdue to changing dietary pattern of consumers; (b)increasing global commodity prices especially metaland chemical prices which ultimately led to higher domestic manufactured prices; and (c) persistentlyhigh international crude petroleum prices in the lasttwo years averaging around US $ 111 per barrel in2011 (Jan.-Dec.) as compared to US $ 80 per barrel(Jan.-Dec.) in 2010.4.4Inflation in primary articles has declineddrastically, falling to 2.25 per cent by January 2012,after remaining in double digits for almost two years
Economic Survey
(Figure 4.1). However, inflation in fuel has continuedto remain high during the last two years. Inflation inmanufactured products had started to acceleratesince January 2011, remaining range-bound between7 and 8 per cent in 2011, due to a surge in metaland chemical prices, but it has also recently startedto moderate.4.5Compared to a relatively benign and stableinflationary period in the earlier part of the lastdecade, average headline WPI inflation started torise in 2008-9 and persisted. The pressure wasmainly from primary and fuel products with theaverage inflation in these commodities remainingpersistently in double digits for a major period since2008-9. In comparison, inflation in manufacturedproducts remained relatively stable, dropping sharplyin 2009-10 because of the global economic crisisand impacts in India, before it started to pick upand exceed its long-run average of around 5 per cent in early 2011-12. Among individual productgroups, inflation in food products, beverages,textiles, chemicals, and basic metals remainedelevated mainly on account of high global commodityprices and cost push pressures (Table 4.2).
   P   e   r   c   e   n   t
Primary Articles
Year-on-year inflation for major groups in WPI
Figure 4.1
   A   p   r   1   0   M   a   y   1   0   J   u   n   1   0   J   u   l   1   0   A   u   g   1   0    S   e   p   1   0    O   c   t   1   0   N   o   v   1   0   D   e   c   1   0   J   a   n   1   1   F   e   b   1   1   M   a   r   1   1   A   p   r   1   1   M   a   y   1   1   J   u   n   1   1   J   u   l   1   1   A   u   g   1   1    S   e   p   1   1    O   c   t   1   1   N   o   v   1   1   D   e   c   1   1   J   a   n   1   2
Manufac-turedProductsFood ArticlesFuel &Power All commo-dities
Table 4.1 Annual Inflation as per Different Price Indices
(per cent)WPICPI-IWCPI-ALCPI-RLMonth2010-112011-122010-112011-122010-112011-122010-112011-12
 April10.889.7413.339.4114.969.1114.969.11May10.489.5613.918.7213.689.6313.689.63June10.259.5113.738.6213.029.3213.029.14July9.989.3611.258.4311.029.0311.249.03 Aug.8.879.789.888.999.659.529.669.71Sept.8.9810.009.8210.069.139.439.349.25Oct.9.089.879.709.398.439.368.459.73Nov.8.209.468.339.347.148.956.959.14Dec.9.457.47 P9.476.497.996.378.016.72Jan.9.476.55 P9.305.328.674.928.695.27Feb.9.54 8.82 8.55 8.55Mar.9.68 8.82 9.14 8.96
Average9.56 10.45 10.00 10.01
: The Office of the Economic Adviser (OEA), Department of Industrial Policy and Promotion (DIPP).
: P : Provisional; CPI : Consumer Price Index; IW : Industrial Workers; AL : Agriculture Labour; RL : Rural Labour 
Prices and Monetary Management
4.6At present the WPI for all commoditiesincluding manufactured products is released onlyon a monthly basis. However, until recently WPI for primary articles and the fuel group was also beingreleased on a weekly basis. This practice wasintended to help in analysing the trends for policy-making as these commodities are essential innature. But it was observed over a period of timethat there was a tendency for upward revisions inthe indices reported once the final numbers werelater released. The higher frequency weekly reportingwas thus prone to more statistical 'noise' andsometimes provided a misleading picture, so thetrade-off was between the more frequent and lessreliable data and less frequent but more reliable data.International practice for reporting CPI inflation isalso on a monthly basis.4.7In view of this, the Cabinet Committee onEconomic Affairs (CCEA) in its meeting held on 24January 2012, agreed to discontinue the weeklyrelease of WPI for the commodities/items under thegroups 'primary articles' and 'fuel and power' withimmediate effect. The last weekly WPI for the weekending 14 January 2012 was released on 27 January2012. WPI shall, henceforth, be released on amonthly basis only.
Table 4.2: Annual Average Inflation by Major Heads in WPI
(per cent)CommoditiesWeight2005-062006-072007-082008-092009-102010-112011-12(Apr.-(Apr.-Jan.)Jan.)PAll commodities100.004.476.594.748.053.809.559.11Primary articles20.124.309.628.3311.0512.6618.419.91
Food articles14.345.389.626.979.0915.2716.757.15Non-food articles4.26-3.325.8011.8612.875.4720.4912.27Minerals1.5215.1518.6411.8422.088.7926.7424.15
Fuel & power14.9113.586.460.0311.57-2.1112.2413.67
Coal2.0917.600.093.3824.303.435.0713.26Mineral oils9.3616.739.14-0.9012.35-4.2916.0317.12Electricity3.452.572.660.840.190.965.741.17
Food products9.971.195.293.548.6913.494.267.35Beverages, tobacco& products1.764.665.106.529.526.117.0811.81Textiles7.33-1.061.880.731.623.4311.059.51Wood & woodproducts0.595.745.846.699.499.604.038.00Paper & paper products2.033.634.602.964.202.204.845.94Leather & leather products0.844.257.953.065.474.93-0.921.76Rubber & plasticproducts2.991.915.614.284.530.745.986.82Chemicals & their products12.023.794.963.574.64- products2.563.4111.5811.192.636.972.595.52Basic metals, alloys& products10.752.239.2810.2911.96-6.128.1011.12Machinery &machine tools8.933.586.313.652.890.462.733.11Transport,equipment/parts5.212.692.222.475.363.082.963.54
: OEA, DIPP.P: Provisional

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