Task- 4

Inflation
Inflation is the gradual loss of purchasing power of a given currency. A quantitative estimation
of the rate at which purchasing power declines can be expressed in the rise in an economy's
overall price level of a basket of chosen goods and services over time. A increase in the general
amount of rates, often expressed as a percentage, means that a unit of currency buys less than
it does previously.

Consumer Price Index (CPI)

The CPI is a price index that examines the weighted average of prices for a basket of goods
and services that are important to consumers. Transportation, shelter, and medical treatment
are among them. The graph above depicts the monthly CPI for the last three years.

The CPI has been rising over the last three years, with the highest CPI in November 2020 and
the CPI trend indicates that a household would spend more money to sustain the same quality
of living; this is generally negative for families, but it can be beneficial to corporations and the
government.
Wholesale Price Index (WIP)

Another common indicator of inflation is the WPI, which calculates and monitors increases in
the prices of commodities before they reach the retail level. Though WPI products differ by
region, they typically contain items at the manufacturer or wholesale level.

The wholesale price index (WPI) is the primary indicator of inflation in India. The WPI is a
price index that estimates the cost of a representative basket of wholesale products. In India,
the wholesale price index is classified into three categories: fuel and power (13.2 percent),
primary articles (22.6 percent of total weight), and manufactured products (22.6 percent of total
weight) (64.2 percent). The Primary Articles Group accounts for 15.2 percent of the overall
weight. Basic metals (9.7 percent of total weight); food goods (9.1 percent); chemicals and
chemical products (6.5 percent); and textiles (6.5 percent) are the most essential components
of the Manufactured Products Group (4.9 percent). The graph above depicts the monthly WPI
transition over the last three years.

The graph above shows the monthly WPI change for the past 3 years. There is a downward
shift in WPI from April 2020 to July 2020, as industrial goods account for 75% of the basket's
weight in the WPI inflation basket. The basket was experiencing extreme deflation. In June,
the price of gasoline fell by 13.6 percent. This is due to the imposition of a lockout due to a
coronavirus epidemic, which has resulted in a decline in demand for these consumer products.
The Gap Between The WPI Inflation And CPI Inflation
The disparity between WPI and CPI inflation is a significant source of concern for
policymakers. In August, the food index in the wholesale price index (WPI) rose just 4% year
on year, compared to a dramatic 8.29 percent increase in the CPI food index. The disparity
between WPI and CPI food reveals supply-side problems.

The distance between the two should close, implying that supply side logistics are being
smoothed out. Food prices had plummeted at the wholesale level after the lockdown in April
and May, only to rise again in the months that followed. This was to be anticipated, provided
that a federal lockdown prevented goods and services from reaching the end user. Add to that
the fact that food is perishable, and it's easy to see why producers would lower their prices. At
the same time, a lack of supply made food more costly at the retail level, as seen in the CPI
index's elevated food inflation. But even after the nationwide lockdown has been lifted, the
benefits of low wholesale food inflation has not flowed to the retail consumer.

Regional lockdowns have made life difficult. Even if wholesale food prices are extremely low,
the RBI cannot neglect the high retail inflation. The elimination of supply-side shocks is critical
for lowering headline CPI inflation. Economists anticipate a slowing of food inflation at the
retail level in the coming months. However, all of this is supposed to be guided by the
predictive base effect. That would imply that market pressures would remain in the economy.

Factors Which Cause Inflation

❖ Growing Economy: In a growing or expanding economy, unemployment drops and

wages usually rise. As a result, more people find themselves with more money in their
pocket, which they're willing to spend on luxuries as well as necessities. This higher
 demand allows suppliers to increase prices, which in turn leads to more jobs, which
puts more money in circulation.
❖ Government Regulation: The government can impose new laws or tariffs that make it
more expensive for companies to produce goods or import them. They pass on those
higher expenses to consumers in the form of increased prices. This results in cost-push
inflation.
❖ Exchange-Rate Changes: When the value of the Indian rupee dips in relation to foreign
currency, it has less purchasing power. In other words, imported products – the majority
of consumer goods bought in India – become more expensive to buy. Their cost goes
up. The resulting inflation is viewed as the cost-push kind.
❖ Expansion of the Money Supply: An expanded money supply can also drive demand-
pull inflation. This happens when the bank print money at the higher rate than economic
growth. This led to large amount of money in circulation which further lead to higher
demand in economy.

Stagflation
Stagflation is described by slow economic growth, increasingly high unemployment, or
economic inflation that is followed by increasing prices. Stagflation is often known as a time
of inflation followed by a decrease in gross domestic product (GDP).

Former Prime Minister Man Mohan Singh cautioned that India was on the verge of entering a
stagflationary era. The ominous forecast was made on the basis of a series of bleak economic
statistics that have alarmed all. In the second quarter of the current fiscal year, growth slowed
to 4.5 percent. Even the first advance forecasts predicted 5% economic growth for the whole
year, with nominal GDP expected to rise at just 7.5%. As if slowing growth wasn't enough of
a concern, the government is still dealing with increasing inflation, which hit 5.54 percent in
November.

Index of Industrial Production (IIP)

The Index of Industrial Production (IIP) is an index which shows the growth rates in different
industry groups of the economy. It is a key economic indicator of manufacturing sector of the
economy.

The eight core sectors that account for roughly 40% of the weight of things included in the
Index of Industrial Production are electricity, crude oil, coal, cement, steel, refinery goods,
 natural gas, and fertilizers. The three general sectors into which IIP constituents fall are mining,
manufacturing, and electricity.

Index of Industrial Production (IIP)

Mar- Feb- Jan- Dec- Nov- Oct- Sep- Aug- Jul- Jun- May- Apr
Months 20 20 20 19 19 19 19 19 19 19 19 - 19
Growth rate -18.7 5.2 2.2 0.4 2.1 -6.6 -4.6 -1.4 4.9 1.3 4.5 3.2
(%)
2019-2020
Mar- Feb- Jan- Dec- Nov- Oct- Sep- Aug- Jul- Jun- May- Apr
Months 21 21 21 20 20 20 20 20 20 20 20 - 20
Growth rate 17.5 -3.6 -0.9 0.4 -1.6 4.5 1 -7.1 - - -33.4 -
2020-21% (Esti 10. 16.6 57.3
mate 4
d)

Comparative analysis
In India, industrial production measures the output of businesses integrated in industrial sector
of the economy. Manufacturing is the most important sector and accounts for 78 percent of
total production. The biggest segments within Manufacturing are: basic metals (13 percent of
total production); coke and refined petroleum products (12 percent); chemicals and chemical
products (8 percent); food products (5 percent); pharmaceuticals, medicinal chemical and
botanical products (5 percent); motor vehicles, trailers and semi-trailers (5 percent); machinery
and equipment. (5 percent); other non-metallic mineral products (4 percent); and textiles,
electrical equipment and fabricated metal products (3 percent each). Mining accounts for 14
percent of total output; and electricity accounts for 8 percent.

Now by comparing the data of 2019-20 with 2020-21 with can clearly see the effect of outbreak
of corona virus on Industrial production. As the coronavirus strike India in the month of March
2020 which led to complete lockdown in the country which further results in severe falling of
IIP growth rate to -18.7% to 5.2% in feb 2020. There was further reduction in IIP growth rate
as lockdown pertains to continue. IIP growth rate fell to -57.3% in the month of April. After
April when gradual reduction in restrictions happen the IIP growth rate started to increase as
few industries started to function. We could see positive IIP growth rate in the month of
 September and October as the lockdown was fully removed and the industries were functioning
well. Again in 2021 manufacturing segment have recorded negative growth. Capital goods
continue to record negative growth of 4.2 per cent in February 2021, which reflects low
investment and low-capacity utilization in manufacturing and infrastructure.

In 2019-20 graph we can see less fluctuations in IIP growth rate as there were no imposition of
lockdown and IIP mostly remain positive except for the month of September and October
which may be due to improper infrastructure or fell in output.

Forecast changes in IIP (Assumptions)

The current forecast is largely based on interpreting data from the previous 7-8 months into the
whole year. In February, all three main industries contracted. Both 23 production firms signed
contracts in February. Mining production fell 3.8 percent in February after rising in January.
Manufacturing output fell 4.9 percent in March, after dipping 1.6 percent the previous month.
Due to second wave of coronavirus India may experience a fall in IIP in the coming quarter.

Purchasing Managers Index (PMI)

The Purchasing Managers Index (PMI) is a measure of the prevailing direction of economic
trends in manufacturing. The PMI is based on a monthly survey of supply chain managers
across 19 industries, covering both upstream and downstream activity.
Monthly April Mar Feb Jan Dec Nov Oct Sep Aug Jul Jun May Apr
21 21 21 21 20 20 20 20 20 20 20 20 20
Growth 55.5 55.4 57.5 57.7 56.4 56.3 58.9 56.8 52 46 47.2 30.8 27.4
Rate %

Comparative analysis

The Purchasing Managers' Index measures the performance of the manufacturing sector and is
derived from a survey of 500 manufacturing companies. The Manufacturing Purchasing
Managers Index is based on five individual indexes with the following weights: New Orders
(30 percent), Output (25 percent), Employment (20 percent), Suppliers' Delivery Times (15
percent) and Stock of Items Purchased (10 percent), with the Delivery Times index inverted so
that it moves in a comparable direction. A reading above 50 indicates an expansion of the
manufacturing sector compared to the previous month; below 50 represents a contraction;
while 50 indicates no change.

The PMI was at 55.5 in April 2021, little-changed from 55.4 in the previous month, beating
market consensus of 51.6, indicating a solid improvement in the health of the sector. Both new
orders and output expanded at the slowest pace in eight months, due to an intensification of the
COVID-19 crisis. Growth was attributed to a pick-up in demand and marketing efforts, though
hampered by the COVID-19 pandemic. At the same time, new export orders surged to the
fastest since last October and buying levels expanded at one of the sharpest rates seen for nine
years. Meanwhile, Employment declined for a 13th straight month and the weakest in the
current sequence of job shedding. On the price front, the rate of input cost inflation accelerated
to the fastest pace since July 2014, while selling prices increased to the highest in seven-and-
a-half years.

PMI decreased to 55.4 in March 2021, the lowest since last August, from 57.5 in the previous
month. Still, the latest reading signalled a substantial improvement in the health of the sector
that outpaced the long-run series average. Output and new orders expanded at sharp, albeit
slower, rates. Also, new export orders increased further in March, stretching the current
sequence of growth to seven months. Meanwhile, Employment declined for a 12th straight
month, due to COVID-19 restrictions and a lack of pressure on capacity. On the price front,
the rate of input cost inflation was among the strongest seen over the past three years.

PMI edged down to 57.5 in February of 2021 from a three-month high of 57.7 in the previous
month and matching market consensus, still signalling a strong month of expansion in the
manufacturing sector. Output and new orders continued to grow at solid rates, while
employment continued to decline. On the price front, input cost inflation accelerated to a 32-
month high due to a faster rise in chemicals, metals, plastics, and textiles. As a result, output
charges rose modestly.

PMI increased to a three-month high of 57.7 in January of 2021 from 56.4 in the previous
month and above market consensus of 56, as the economy continued to recover amid the
loosening of COVID-19 restrictions. Output growth accelerated to the fastest pace since last
October while new orders rose quickly in three months.

Forecast changes in PMI (Assumptions)

According to trading economics global macro models and analysts ' expectations,
manufacturing PMI in India is expected to be 52.00 points by the end of this quarter. PMI tends
to reduce further to 51 in Q3. This may be due to an increase in Coronavirus infections and the
imposition of lockdown.

PREPARED BY:

Abin Som

Christ University Bangalore

Junior Research Analyst

(21FMCG30 B5)