TASK 4: There is no such thing as one size fits all

MACROECONOMIC ANALYSIS

INFLATION:
It is the rise in the prices of most goods and services of daily or common use, such as food,
housing, transport, consumer staples, etc. Inflation measures the average price change in a
basket of commodities and services overtime.
Some of the factors which causes inflation are:
• Increase in money supply
• Increase in disposable income
• Increase in consumer spending
• Increase in public expenditure
• Expansion of private sector
A basket of goods is a constant set of general goods produced in an economy whose prices are
tracked over time. As the products in the basket increases or decreases in price, the overall
value of the basket changes. The basket of goods includes basic food and beverages such as
cereal, milk, and coffee. It includes housing costs, bedroom furniture, apparel, transportation
expenses, medical care costs, recreational expenses, toys and the cost of admissions to
museums also qualify. Education and communication expenses are included in the basket’s
contents, and the government also includes other random items such as tobacco, haircuts, and
funerals.
The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures
the percentage change in the price of a basket of goods and services consumed by households.
The other indicator is the Wholesale Price Index (WPI), measures and tracks the changes in the
price of goods before they reach consumers; goods that are sold in bulk and traded between
entities or businesses.
Reasons for observing divergence between CPI & WPI:
• The difference in weightage assigned to different goods/items that make up the two
baskets.
• The manufactured goods are given more weightage in the wholesale basket. Therefore,
any movement in the price of such items will move the WPI more than it does the CPI.
Stagflation:
Also known as recession-inflation is a situation in which the inflation rate is high, the economic
growth rate slows, and unemployment remains steadily high. Stagflation can also be
alternatively defined as a period of inflation combined with a decline in GDP.
The contraction of GDP along with the rising inflation rate ignites the fear of stagflation in
Indian economy. Most economic research firms and rating agencies predict 10-12 per cent GDP
contraction in FY21. The RBI, in its monetary policy statement on August 6, had predicted that
headline inflation may remain high in second quarter of FY21 but moderate in second half of
the financial year. The risk of second Covid-19 wave could also keep inflation high.
COMPARATIVE ANALYSIS
WPI – monthly

2018
124
122
120
118
116
114
112
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2019
124
123
122
121
120
119
118
117
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2020
126
124
122
120
118
116
114
112
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
 2021
130

129

128

127

126

125
Jan Feb Mar

WPI – yearly

124

122

120

118

116

114

112

110
2019-20 2018-19 2017-18

WPI analysis
The annual rate of inflation stood at 7.39% (provisional) for the month of March, 2021 over
March, 2020. However, month-on-month (March 2021 over February 2021) rate of inflation
stood at 1.57 %. The prices of crude oil, petroleum products and basic metal substantially
increased in March 2021 as compared to the corresponding month of last year. Also, due to
nationwide lockdown, the WPI index for the month of March 2020 was computed with
relatively low response rate.
The annual rate of inflation, based on monthly WPI, stood at 2.59% (provisional) for the month
of December, 2019 (over December,2018) as compared to 0.58% (provisional) for the previous
month and 3.46% during the corresponding month of the previous year. Build up inflation rate in
the financial year so far was 2.42% compared to a build-up rate of 2.92% in the corresponding
period of the previous year. In view of the limited transactions of products in the wholesale market
in the month of April, 2020, due to spread of Covid-19 pandemic, it has been decided to release
the Price Movement of selected Sub-groups/Groups of WPI, following the principles of adequacy.
All Commodities WPI could not be computed for April-2020 due to non-availability of
manufactured product group index.
February 2021 shows the highest reading since November 2018, amid rises in cost of both
manufactured products and fuel and power. Wholesale prices in India declined by 3.1 percent
year-on-year in May 2020 and compared with market estimates of a 1.05 percent fall. This was
the steepest drop in wholesale prices since November of 2015, amid strict public health
measures to contain the spread of coronavirus outbreak.
CPI – monthly

2018
930
920
910
900
890
880
870

CPI-AL CPI-RL

2019
1050
1000
950
900
850

CPI-AL CPI-RL

2020
1100
1050
1000
950

CPI-AL CPI-RL
 2021
1050
1045
1040
1035
1030
Jan-21 Feb-21 Mar-21

CPI-AL CPI-RL

CPI – yearly

10

0
2017-18 2018-19 2019-20

AL RL

CPI analysis
The average CPI-C headline inflation declined to 3.4 per cent in 2018-19, which is the lowest
average since the new series of CPI-C began. Headline CPI-C inflation has remained below
4.0 per cent for two consecutive years. The decline in the inflation in the FY 2018-19 was
mainly due to low food inflation which ranged between (-)2.6 to 3.1 per cent. The moderate
inflation rate of less than 4 per cent was maintained for straight 8 months during the FY 2018-
19. The CPI-C inflation for the month of April 2019 stood at 2.9 per cent same as in March
2019 as compared to 4.6 per cent in April 2018. Food inflation has been the major driver of
inflation during the current financial year, 2019-20. Some commodities such as onion, tomato
and pulses have shown high inflation since August 2019.
PURCHASING MANAGER’S INDEX (PMI)
It is an economic indicator derived from the monthly surveys of private sector companies. It is
a measure of the measure of the prevailing direction of economic trends in manufacturing. The
headline PMI is a number from 0 to 100. A PMI above 50 represents an expansion when
compared with the previous month. A PMI reading under 50 represents a contraction, and a
reading at 50 indicates no change.
 2018
55
54
53
52
51
50
49
48
47

2019
55
54
53
52
51
50
49
48
47

2020
70
60
50
40
30
20
10
0
 2021
57.5
57
56.5
56
55.5
55
jan feb march

PMI analysis

The growth in sales of two-wheelers and tractors reflects buoyant rural consumption. Capital
goods production registered a 19-month high growth in January 2018, indicative of the likely
traction in investment demand. Housing loans extended by banks have increased significantly,
which is a positive for residential investment. External demand remains a weak link.
Merchandise import growth has slowed because of gold imports; simultaneously export growth
has also weakened.
Households’ inflation expectations, measured by the March 2018 round of the Reserve Bank’s
survey of households, edged up for both three-month and one-year ahead horizons.
Manufacturing firms covered in the Reserve Bank’s Industrial Outlook Survey reported input
price pressures and an increase in selling prices in Q4:2017-18, which are expected to continue
in Q1:2018-19. Manufacturing and services firms polled by PMI also showed a rise in input
and output prices in Q4. Merchandise export growth decelerated in January and February 2018,
pulled down by a slowdown in exports of gems and jewellery, readymade garments and
engineering goods. Import growth also moderated in February due to a decline in gold imports,
lower growth in nonoil non-gold imports, and contraction in imports of transport equipment,
vegetable oils and pulses. As import growth continued to exceed export growth in January-
February, the trade deficit widened.
Economic decision:

Suppliers also make decisions based on the PMI. A parts supplier for a manufacturer follows
the PMI to estimate the amount of future demand for its products. The supplier also wants to
know how much inventory its customers have on hand, which also affects the amount of
production its clients must generate. PMI information about supply and demand affects the
prices that suppliers can charge. If the manufacturer's new orders are growing, for example, it
may raise customer prices and accept price increases from its suppliers. On the other hand,
when new orders are declining, the manufacturer may have to lower its prices and demand a
lower cost for the parts it purchases. A company can use the PMI to help plan its annual budget,
manage staffing levels, and forecast cash flow.

Investors can also use the PMI to their advantage because it is a leading indicator of economic
conditions. The direction of the trend in the PMI tends to precede changes in the trend in major
estimates of economic activity and output, such as the GDP, Industrial Production, and
Employment. Paying attention to the value and movements in the PMI can yield profitable
foresight into developing trends in the overall economy.
INDEX OF INDUSTRIAL PRODUCTION (IIP)
The Index of Industrial Production (IIP) is a composite indicator that measures the short-term
changes in the volume of production of a basket of industrial products during a given period
with respect to that in a chosen base period. The whole India IIP is a composite indicator that
measures the short-term changes in the volume of production of a basket of industrial products
during a given period with respect to that in a chosen base period.
IIP monthly

GENERAL
20.0
10.0
0.0
Jul-18

Jul-19

Jul-20
May-18

Nov-18

May-19

Mar-20
Nov-19

May-20

Nov-20
Jan-18
Mar-18

Sep-18

Jan-19
Mar-19

Sep-19

Jan-20

Sep-20

Jan-21
-10.0
-20.0
-30.0
-40.0
-50.0
-60.0
-70.0

IIP annual

GENERAL
5.0

4.0

3.0

2.0

1.0

0.0
2017-18 2018-19 2019-20
-1.0

-2.0

IIP analysis
India's industrial output dropped 3.6 percent from a year earlier in February 2021, the most
since last August and compared with market expectations of a 3.0 percent decrease.
Manufacturing production shrank 3.7 percent (vs -1.3 percent in January), led by declines in
manufacture of basic metals (-4.8 percent vs 6.0 percent), coke and refined petroleum products
(-9.5 percent vs -0.5 percent), chemicals and chemical products (-1.8 percent vs 2.6 percent),
food products (-0.6 percent vs -3.3 percent), pharmaceuticals, medicinal chemical and botanical
products (-4.8 percent vs -8.0 percent), machinery and equipment n.e.c. (-1.9 percent vs -7.2
percent), and other non-metallic mineral products (-7.0 percent vs -6.1 percent). Meanwhile,
mining output was down 5.5 percent (vs -2.5 percent in January), while electricity output edged
0.1 percent higher (vs 5.5 percent in January). India’s industrial output dropped 3.6 percent
from a year earlier in February 2021, the most since last August and compared with market
expectations of a 3.0 percent decrease. Manufacturing production shrank 3.7 percent (vs -1.3
percent in January), led by declines in manufacture of basic metals (-4.8 percent vs 6.0 percent),
coke and refined petroleum products (-9.5 percent vs -0.5 percent), chemicals and chemical
products (-1.8 percent vs 2.6 percent), food products (-0.6 percent vs -3.3 percent),
pharmaceuticals, medicinal chemical and botanical products (-4.8 percent vs -8.0 percent),
machinery and equipment n.e.c. (-1.9 percent vs -7.2 percent), and other non-metallic mineral
products (-7.0 percent vs -6.1 percent). Meanwhile, mining output was down 5.5 percent (vs -
2.5 percent in January), while electricity output edged 0.1 percent higher (vs 5.5 percent in
January).
CONCLUSION
The union government kept the inflation target of the monetary policy framework unchanged
at 2-6 per cent for the next five years, until the financial year 2025-26. Looking forward, we
estimate Consumer Price Index CPI in India to stand at 163.39 in 12 months’ time. In the long-
term, the India Consumer Price Index (CPI) is projected to trend around 170.95 points in 2022
and 177.11 points in 2023, according to our econometric models. If GDP at current prices
grows more than the GDP at constant prices, then that points towards a presence of an upward
inflationary pressure. So, maintaining a tolerable price level remains an immediate challenge.
Industrial Production in India is expected to be 15.10 percent by the end of this quarter,
according to Trading Economics global macro models and analysts’ expectations. Looking
forward, we estimate Industrial Production in India to stand at 4.00 in 12 months’ time. In the
long-term, the India Industrial Production is projected to trend around 4.20 percent in 2022 and
4.80 percent in 2023, according to our econometric models.

Submitted by,
Meghna B Raj
Finance department
21FMCG60 B4