Inflation Softens in November Due to Fall in Food Prices and Demonetization, Industry Output Down


Wholesale Price Index (WPI) for the
month of November, 2016 moderated to 3.15% as compared to 3.39% in the previous
month. Softening of prices is the impact of the demonetization which has slowed
the down the economy to a certain extent. The moderation in food inflation also
has helped in keeping the inflation rates under check. The food inflation fell sharply
to 1.54% as compared to 4.34% in the previous month. The softness in the
wholesale vegetables and pulses basket is a welcome relief for the economy. In fuel and power segment, inflation rose
to 7.07% as compared to 6.18% in the previous month, it is expected to rise
further as OPEC nations have decided to cut down the supply of crude.
Inflation takes into account the prices paid by the manufacturers on the goods
imported and used as inputs. Favourable Monsoon has really come as boon for the
Government and Economy as it can now focus on steps to accelerate industrial
growth but the demonetization is bound to have an adverse impact on the economy
in the short run. On month to month basis Primary articles rose by 1.25% as
compared to (-)3.31% in the previous month while Manufactured products rose to
3.20% from 2.67%. The index provides Primary Articles with 20.11% weightage,
64.97% for manufactured products and power & fuel with 14.91%.

The rise in prices of Manufactured
Products shows improvement in bargain powers of the producers primarily due to
the holiday season and is expected to continue in the coming month.

It will be interesting to see the
impact of demonetization on the inflation in the coming few months. The
decision to curb the circulation of counterfeit notes and undisclosed incomes
is a welcome one but the outcome of such a move remains to seen. 


Price Index (CPI) fell to 2 year low in the month of November, ‘16 as it stood
at 3.63% as compared to 4.20% in the previous month. Largely due to the
demonetization announced by the Government last month which wiped out almost
86% of the currency valuation in the country. Food Inflation fell to 2.11% from
3.32% recorded in the previous month. Prices of vegetables saw a steep slide in
the previous month which was a combine impact of demonetization and good
monsoon season. Consumer Food Inflation has 47% weightage in CPI Index. The
downtrend shows that monsoon has been good for crops and resulted in prices
being under control.

With Inflation in check, RBI may be
tempted to cut the lending rates but it has to be cautious with its future
moves. Industrial Output is also pretty choppy as of now.

CPI falling, which is attributed to
higher weightage being given to retail inflation, reflects the true impact of
inflation on Common People. Going forward, stability in CPI will lead to
strengthening of the economy and would call for changes in the monetary policy.
However, the demonetization has impacted the common people as 90% of the
transaction is cash based. 


Index of Industrial Production (IIP) contracted
by 1.9% in the month of October,’16 as compared to rise of 0.7% witnessed in September,2016.
IIP figures have been fluctuating for quite some time now as it has failed to gain
any momentum.

The fall is mainly contributed due to
slowness in Manufacturing Sector. As manufacturing sector fell by 2.4%, whereas
Mining sector fell by 3.1%, while the Power Sector grew by 1.1%. The Capital
Goods fell steeply for the 12th month in a row by (-)25.9% while
Consumer Durables Sector grew by 0.2%.  The
impact of demonetization is expected to further slow down the Industrial

The growth of factory output is
essential for the economy. Industrial growth is mandatory for creation of jobs,
however the turbulent European market and China slowing down is a cause of
concern and one needs to be cautious going forward.

The Information Technology (IT) sector
has been generating decent number of jobs every year but they too seem to be
struggling during this turbulent phase which is not good news for the job

As I had mentioned previously, growth
in Manufacturing Sector is the only way forward for the economy. Thus the rise
in the core sectors along with few others will definitely help the Economy to move
forward. Manufacturing Output also constitutes 75% of IIP data. 


RBI has set a target of achieving CPI
below 5% by March,2017 and seems on course to achieve it. The inflationary
pressure is expected to ease in the coming months.  

RBI wants to ease Consumer Inflation
to 4% by 2021 as against 2018 proposed earlier. However, for the time being if retail
inflation remains within 4.5%-6%, RBI should be fairly satisfied.

RBI will be cautious as of now as it
has to balance growth and minimize the impact of demonetization. Thus rate cut
may not be expected immediately.

The impact of demonetization has to be
closely monitored as it is bound to have an impact on the economy. The GDP will
miss its target for the current financial year.

India’s exports recorded a growth in
last couple of months which is a positive sign. However, the export figures
from other developing nations are not very promising, suggesting stagnation. Electoral
changes and other economic factors are contributing to the economy being
cautious. Demonetization is also expected to adversely impact the Exports
according to experts. Exports were on decline for almost 2 years but seemed to
turn positive in last couple of months.

Global Sentiments are pretty reserved
at this point of time with China slowing down. The major challenge at this
point of time is to ensure economic stability and safeguard the Interests of
developed and developing economies of the world.

India is emerging as the most
preferred destination for the Investors and promises to bring in more and more
investments which augurs well for the economy as well the as the population. Demonetization is bound to have an adverse impact but hopefully the economy will be able to turnaround soon.


Leave a Reply