wholesale prices are witnessing a downward trend after several months. From as high as over 10% a few months back, they have come down to 4.89% in April 2013. The RBI can pat its back that its hawkish monetary policy has paid off at last. The central bank has indeed been effective in bringing down the WPI, lower than even the 5.5% targeted for 2013-14.
Empirically, it has been established that a developing country experiences a functional rise of 5-6% in prices with a steady rise in GDP while deflationary trends normally accompany a recession. What are we passing through then? The industry grew by 2.5% in March 2013, manufacturing grew by 3.2% and capital goods saw positive growth of 6.9% after negative growth over several months. The prices of manufactured items, which carry a weight of 64% in the WPI, moved up by only 3.4% in April 2013. This may be considered against a 5.4% rise in November 2012.
Specifically, prices of basic metals, alloys and metal products dropped by 0.96% in the last one month, down from a rise of 4.5% five months back. Similarly, prices of the iron and semis category, which grew by 4.3% in November 2012, experienced 7.44% degrowth last month. The rate of decline in prices of steel and steel-related items over the past five months by far exceeds the price drop for all other manufactured items, cement, lime and even foodstuff.
There are a few explanations for this development. First, the benefits of a drop in steel prices may not get reflected in the prices of its finished products, thereby depriving the customer of the advantage from a fall in raw material costs. Second, the drop in steel prices is absorbed to maintain at least the current level of operating margins of many finished products, all suffering subdued demand. Third, official data on WPI are always subject to revision as WPI for February 2013 has just undergone a revision to 7.28% from the 6.84% reported earlier.
The upward pressure on finished steel prices due to movement in raw material prices is going away due to a drop in iron ore price to $125 per tonne CFR China and coking coal price to $150 per tonne fob Australia. The lack of visibility around the solution of the eurozone crisis, a halt in revival of the US economy, Japanese economy?s delayed response to the latest stimuli and slower growth of China amid conflicting signals ? all of them point to continuation of the current scenario for a few more months.
It also throws up the fact that unless the global economy sees clear emergence of ?green shoots?, decisions on acquisition of global assets, whether in the form of raw materials or finished goods, are likely to be deferred and utmost attention will be focussed on exploring the domestic market, which is bound to grow following clearances for mega projects, to start with.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal