MSP hike spills over to WPI inflation

Updated: April 4, 2019 7:17:53 AM

Deflation in food articles, which have a near 46% weight in the CPI basket, has kept a leash on overall retail inflation for five months now.

In key pulses such as tur and moong, where the MSPs were raised by 4.1% and 25.1%, WPI inflation touched 14.7% and 13.5%, respectively. The official procurement is restricted to only rice, wheat and cotton.

By Prabhudutta Mishra & Banikinkar Pattanayak

A sharp hike in minimum support prices (MSPs) of various crops, announced by the government last year to honour its promise of ensuring farmers a 50% profit over costs, seems to have started to spill over to wholesale price inflation, even in commodities where official procurement network doesn’t exist.

Retail inflation, however, has largely been insulated from the MSP hike so far. Given its focus on retail inflation, the monetary policy panel could ease its stance from “neutral” to “accommodative” on Thursday on persisting risks to growth momentum, analysts reckon.

A glimpse at the price movement in key summer crops suggests WPI inflation in coarse cereals such as jowar, bajra and maize — which saw the maximum hikes in the benchmark prices in 2018-19 — has jumped substantially in the range of 26% to 39% in February.

Samiran Chakraborty, chief India economist at Citibank, told a TV channel that against the MSP increase of about 15% (weighted average), wholesale prices of these commodities are up about 9.5-10% so far. “So roughly a half or a little more than a half of the MSP increase has been passed through in wholesale prices, but we don’t see that at all in retail prices,” he said.
Not surprisingly, wholesale price food inflation jumped to 4.28% in February, from 2.34% in the previous month and as low as (–)3.24% in November 2018 (when kharif harvests picked up pace).

While the spike in WPI inflation in some of these items was aided by the base effect (they had witnessed deflation in February 2018, reflecting farm distress), the hike in MSPs of kharif crops in the range of 4% to 52% in July 2018 seemed to have weighed on market sentiments as well, especially after harvesting was over in December.

This could ultimately spill over to retail inflation in these items and drive up the overall consumer price index (CPI).

Data showed that even in crops like sunflower seeds, cotton (medium staple) and sesamum, against the MSP hikes of 31.4%, 28.1% and 17.9%, respectively, for 2018-19, WPI inflation jumped 26.6%, 5.8% and 30.7% in February.

In key pulses such as tur and moong, where the MSPs were raised by 4.1% and 25.1%, WPI inflation touched 14.7% and 13.5%, respectively. The official procurement is restricted to only rice, wheat and cotton.

Deflation in food articles, which have a near 46% weight in the CPI basket, has kept a leash on overall retail inflation for five months now. However, it narrowed to (–)0.66% in February from (–)2.24% in the previous month. Consequently, overall retail inflation rose to 2.57% in February, reversing January’s 19-month trough of 1.97%.

Given that CPI inflation is still benign, some analysts expect it to remain around 4% in the first quarter of FY20. However, the RBI’ projection of 3.2-3.4% for the first half of FY20 could be under threat if the rise in wholesale food prices spills over to the retail level and oil prices keep rising following Opec’s recent decision to trim output.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition
FinancialExpress_1x1_Imp_Desktop