Widespread supply disruptions and low demand due to a harsh, nationwide lockdown in May have led to wholesale price deflation after nearly four years. Deflation refers to falling prices and one of the causes is a decrease in overall demand. So though not unexpected, the latest data points to prolonged pain in the economy via severe demand contraction.
According to Commerce Ministry data, the wholesale price index (WPI) saw deflation of 3.21% in May due to sharp decline in prices of fuel, power and manufactured products.
WPI measures the movement of prices at the wholesale level and indicates that prices of some items which comprise this basket had fallen below last year’s level during the month. The deflation in May came after nearly four years, since November 2015, but the data come with a caveat: not all the usual products have been included and there is a high chance of a downward revision at a later date.
Analysts are already predicting that deflation in WPI could continue throughout the first half of the current fiscal, till at least September, as commodity prices remain modest and demand remains uncertain. And the prospect of continued deflation could lead the Reserve Bank of India (RBI) to further cut lending rates in the coming weeks to spur that elusive demand.
Economists are divided over whether any such action by the central bank would help accelerate economic growth, with some suggesting that it should instead be helping state governments to spend more by providing cheaper loans.
Economists and ratings agencies have already revised their earlier growth forecasts for India for 2020-21 downwards by a large margin and are unanimous that GDP would contract in double digits in the present quarter (Q1 2020-21, April-June).
The central bank has already slashed the repo rate – the rate at which it lends to banks – by more than a percent in the last few quarters on concerns over faltering growth, even when the pandemic had not arrived on Indian shores. So will RBI’s accommodative stance on policy rates, as predicted by economists, help matters going forward?
Economist Jayati Ghosh says that the RBI slashing rates will not “make a difference in a situation of such depressed demand. Instead, RBI should buy state government bonds and provide them loans at the repo rate (as it is doing for some crony companies) to enable them to spend more”.
In any case, the RBI alone cannot be seen bearing the burden of spurring growth through monetary policy measures – the government also needs to step in with fiscal support.
And here, continued reluctance on the part of the government to offer any meaningful fiscal relief is evident. The much-touted fiscal stimulus package announced last month, where the government claimed it had infused more than Rs 20 lakh crore or nearly 10% of the country’s GDP, has failed to enthuse most sectors.
Experts have pointed out that only about a tenth of not even Rs 2 lakh crore is the new investment out of this mega package as it is a mix of existing schemes, medium to long term reforms and does not inject the much needed cash into the economy.
Finance Minister Nirmala Sitharaman has indicated in interviews earlier that the government is open to providing more fiscal stimulus to help the economy but there is no clarity on whether this will happen and if it does, in what form.
From all available indications and macro-economic data, a second round of stimulus is not just the need of the hour, it could be critical to sustain even the lowered economic contraction forecasts. The spread of the virus remains unpredictable and an extended lockdown has already had a detrimental effect on the economy.
Meanwhile, even as the debate over whether further rate cuts by the RBI are a good way of spurring demand in the absence of further fiscal stimulus continue, it is important to also note another phenomenon seen during the lockdown: continued retail food inflation despite a crash in wholesale prices. The price we pay for groceries at the local grocer or for buying daily fruits and veggies did not fall during the lockdown and therein hangs a tale.
ICRA said in a note that year-on-year wholesale inflation for primary food articles softened to 1.1% in May from 2.6% in April, which is likely to reflect limited demand from the hotels and restaurants segment amid the lockdown. In particular, vegetables recorded a disinflation of 12.5% against an inflation of 2.2% in April, reflecting the trend for onion and tomato. The annual inflation eased in May relative to April 2020 for condiments and spices, pulses, milk and cereals even though prices of eggs, meat and fish rose during the month.
The divergence between wholesale and retail prices is evident from many reports of farmers throwing away daily essentials like onions, tomatoes, even milk during the lockdown period as their earnings during April and May from these products had dwindled to ridiculously low levels. This, when purchasing these items from the local vendors had not become any easier on the pocket in cities.
Farmer leader Kedar Sirohi pointed out that the biggest divergence between wholesale and retail prices was seen in tomatoes, cucumber, bananas and water melon. These and other summer veggies and fruits were fetching the farmer just Rs 2-3 per kg in the wholesale markets but were being retailed at Rs 30-40 in cities.
During the lockdown period, milk was selling at Rs 14-15 per litre in wholesale whereas its retail prices rose to Rs 50-70 per litre in cities. So the wider-than-usual gap between wholesale and retail prices in at least food items becomes clear with these examples and it also explains the WPI deflation seen in May.
But the pressure on wholesale prices has already started easing and Sirohi said onions, which carried a wholesale price of just Rs 3 during the lockdown are already fetching Rs 8 per kg.
Analysts have noted that supplies have normalised in the agricultural market but there are continuing problems of transporting produce to retail markets. And a demand contraction for all but essential products continues. A bumper rabi crop has increased distress sales (below the MSP) and with a normal monsoon forecast, the kharif crop is also likely to be good, leading to further pressure on food prices.
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