CPI or WPI?

Back after a really long gap. I was training to be part of the first team of astronauts from India to Mars. I failed to make the cut so am back now on this website. Only to discover that all my money that was parked in midcaps has all but disappeared while I was away! I should have made that trip, I now regret my failing the entrance tests. Isn’t it true that Mars is the ruling planet of all midcaps? fiery, combative and volatile. mangal ho sabka!

The other big news is that the lady that’s our household help is hoping to be a leg up over inflation and has therefore delivered a verbal notice (in Telugu) for a generous increase in her wages. Since we don’t understand Telugu, that’s what we understood her point to be. Surely, she follows the other Andhra gentleman who is also the RBI guv, who seems quite sure that dipping the repo isn’t really going to get general prices down. He means ‘consumer’ prices. If you remember, the earlier technicality was to do with whether inflation is ‘supply side’ or ‘demand driven’. RBI said supply side constraints were pushing up prices. Point being that an increase in production capacity and productivity would bring prices down. On the other hand, the finance ministry seemed to have said all along that tweaking the monetary levers would push prices down – a reduction in rates would get investment and spending cycle going and therefore Mumbai should reduce the repo rates. Now, the debate has shifted to which rate should one look at. The RBI guv points to the stubborn consumer prices and demands that the government of the day do some serious belt tightening while Delhi points out the recent decline in prices in the mandis and thereby makes a stronger case for rate cuts going forward.

So is it the wholesale prices (tracked by the WPI) or the prices that end consumers pay (tracked by the CPI) should one follow? The answer surely cannot be the very Indian, “it depends” since, after all, economic policy and long term planning (as also salary revisions!) depend on the rate chosen. Most countries use the CPI and have dropped the WPI from their economic planning game since the seventies. The RBI is proposing we pay more attention at the CPI and make that our official inflation rate instead of the WPI. It’s said that since the CPI tracks movement in prices at the ‘point of sale’ that is really what matters to a country’s citizens. General public cannot buy at mandis at wholesale prices. So therefore, lets change our official inflation gauge to CPI instead of being one the few countries (Pakistan gives us company) that remain fixated on the WPI. Personally, I feel that the WPI serves us well. We are predominantly an export driven economy. The other industrialized nations have made the transition to being completely consumer driven industries. So they track consumer price level changes. What is confusing to me is China’s decision to move away from WPI in favour of the CPI like the industrialized nations – I personally think it is very much an export driven producer economy (bigger version of India) and the consumer culture has not yet set in there.

CPI vs WPIIt’s really funny – in 2008, when the CPI in India was way lower (7%) than the WPI (12%), people (i.e. industry lobbies) were pointing to the high CPI and asking for a rate cut. Now they are pointing to the WPI and still asking for rate cuts. This led me to read up articles on the net to check if there is some cyclicality, causality or inter-dependence between the WPI and the CPI. The reason why the WPI and CPI are not moving in step is easy to understand – just look at the constituents of the indices to figure it out. There’s no rocket science or great economic mumbo-jumbo when the Prime Minister says that the food costs are running ahead of all else – more so, those of the protein based foods. Core CPI (ex food and fuel) has really dropped from 10.5% (in Jan’12) to 8% (in Jan’13) – so it’s pretty obvious that the reason why the CPI as a whole is still ruling at 10.5% is because of food and fuel. The weightage of food and fuel is very different across the WPI and CPI. The weights of the items that form the CPI basket are derived from their share in a typical consuming household. So things like imports and exports and wastage and storage (remember food stocks piled up in FCI godowns?) become critical factors that can make end buyer prices very different from producer prices. At a very general level, does it not mean that WPI + supply chain related affects = CPI? You get the idea, right? So I did two things – I looked up the internet and also plotted CPI and WPI values over the past 7 years to check if any patterns or correlation exists. Take a look at this paper which says that in India, the WPI leads the CPI. It points out that the WPI seems to be predicated by market forces and that controlling the factors affecting WPI can give a lever to controlling the prices at the consumer level. India’s per capita income, though low, is increasing and the nation’s consumption basket is slowly shifting towards non-core food items and hence despite the high weightage of food items in the CPI, it is unable to lead the WPI to a greater extent. So, while the paper does point to the presence of bi-direction causality, the impact of the WPI on the CPI is higher than that of the latter on the former. Also, WPI leads CPI which makes it the leading indicator of consumer prices and therefore eligible as a inflation planning gauge in the Indian context.

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The Price of Food

I stopped by at a local grocery store on my way back home to pick up something for breakfast. The idea was to wedge an  oregano infused, golden brown double omlette inside slices of whole wheat bread layered in garlic and chilly-garlic mayonnaise. The ensuing breakfast was bearable, but the previous evening commerce gave me something to write about: the escalating prices of food in India. The egg at INR 3 per egg is a lot of egg in the face and the whole wheat bread leavened me with its INR 22 tag. I would recommend heading to the nearest kirana store, especially if you haven’t personally shopped for a while. I am sure the prices will shock you. Any crescendo that escalates at c15% per annum would.

I am sure Humpty Dumpty would have an even mightier fall today than during the early 19th century when he/it was conceived as being perched on that wall. The reason is simple – eggs are dearer since poultry feed prices (corn, et al) are increasing fast both in local as well as international markets. And that may not bode well for companies like Godrej (Real Good chicken, sob sob) and Venky’s India Limited.

There was a lot of attention to the Reserve Bank of India’s (RBI) winging up of its repo rates in a bid to contain inflation. Whether this move has its desired effect or not remains to be seen (in media). Actually, such causality might be difficult nee impossible to establish. Since a section of the intelligentia remains convinced that monetary tricks do not influence food prices and therefore the hesitant intervention by the RBI may not really amount to anything. While you may have certainly caught the story of the repo rate hike, this sagacious comment by Montek Singh Ahluwalia may have escaped your notice:

Rural areas have benefitted from the economic prosperity seen in the country. Demand for foodgrain, milk, vegetable and protein have gone up. It is a good development

Of course it is! But our preparedness to tackle the implication of that (i.e. a higher price level) may not be. The Deputy Chairman’s (of the Planning Commission) comment reminds me of a similar observation by the President of the United States (was it Clinton?) that countries like India should eat less! Here are some facts: per capita income in India has increased from 24,095 in 2004/05 to 43,749 in 2009/10 – that’s a CAGR of 13%. Agricultural productivity has lagged this rapid growth in incomes – growing at only 2% per annum. The large transfer of purchasing power via the Rural Employment Guarantee scheme has indeed ushered in a new found prosperity in rural India. In my native village, I never used to see the local folk eat vegetables and fruits. It was always variations of millets and pulses. They now have started to add variety to their cuisine, and as Mr. Ahluwalia says, what’s wrong with that?

There is an expectation of rice prices coming down this year due to the copious amount of rainfall that we received this monsoon but that might be washed out too. For since 2005, there has been a continuous rise in prices regardless of the monsoon. So what gives? It has to be basic demand and supply. If demand goes up and supply remains constant then the prices have to increase, right? How I wish our planners get this right – the re-rating possibilities for the fertilizer industry (if it can get it’s gas supply worries sorted!), micro finance organizations, irrigation sector (Jain Irrigation, Yo!) would be significant.

Our production is focused largely on basic food grains which are certainly not income elastic – i.e. one does not start consuming more rice or chapattis if one’s income rises. However, things like eggs, butter, fruits, vegetables, milk, meat etc are most certainly in greater demand if income rises. This will be difficult for someone from the industrialized world to understand, but in India, these food articles are aspirational to many. There are 370 million people currently in India living below the poverty. Forget an apple a day, even if they have consumed an apple in a lifetime till today, they’d be lucky. But all that will change and is changing…slowly. We need good old Keynesian artifacts in Indian agriculture, not RBI’s intervention. The focus should be on the Agricultural Ministry and not the Ministry of Finance.

And while Shri Sharad Pawar remains overworked and occupied by the political flux in Maharashtra, I do not think he is the only one to blame. The reason for the rotting mountains of grain in the Food Corporation of India’s (FCI) godown is less a consequence of callous administration as much as it being a fallout of India’s federal structure of government. It’s a states of the Union vs. the Union issue. The center just cannot get the states to lift off the stocks – I do not know why but I can guess that it must be due to pricing issues. FCI’s hoards cannot be culled by a mere addition of storage capacity. That’s a long term process – the short term measure is getting trucks to line up at FCI’s godowns are carting the stuff away. At least Sonia Gandhi did admit that the responsibility of bringing down food prices is as much the responsibility of the center as it is of the states.

The other important aspect is the cost of farming. In my village, a daily wage woman labourer was paid INR 50 a day to plant onion seeds. This year she is getting paid Rs.100. Male labourers are demanding INR 150. Just like the BPO industry, cheap labour that gave Indian agriculture its competitive edge is blunting rapidly. Cotton is another crop that is sown by my cousins in their farms. They are paying farmhands Rs4.50 for picking cotton this year, again double from last year. They tell me that the total labour cost for cotton has touched INR 15 per kilo this year. I can only imagine the plight of the farmland owners in rich Punjab and Haryana! This again comes back to the point – if a business has to start paying more per unit of labour then it needs to extract greater productivity per unit of labour. The fracas over the modest brinjal shows how arduous the path to this goal will be. Our farms need more mechanization, drip irrigation (Jain Irrigation, yo!), better seeds, non-urea fertilizers and understanding politicians.

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