The wholesale price index (WPI) inflation for April has come in at 0.3 per cent, breaking the 17 month-long stretch of being in negative territory. There are several ways in which this can be read. It could be said that the data is just for one month and does not represent a trend. Moreover, a little inflation is a good thing for the economy as it incentivises production. However, seen differently, this turnaround in the WPI might be the signal of a more widespread hardening of prices in the economy. If that happens, it may result in Reserve Bank Governor Raghuram Rajan turning on the tap on his “accommodative” stance in monetary policy and shutting the door on further interest rate cuts.
There are several reasons why an increase in the WPI may not augur well for the economy. For one, the prime drivers of the WPI increase are food articles. Prices of pulses, which have in general remained pretty high over the past year and a half, lead the pack yet again.
Worse, now there is double-digit inflation in the prices of potato and sugar as well. The increase in prices of these food articles is, in turn, largely driven by supply-side constraints as well as the mismanagement of the food economy. Back-to-back droughts have taken their toll on rural productivity. Arbitrary and ill-timed government interventions along with inadequate focus on creating buffer stocks have made things worse. Moreover, an increase in the WPI, driven by food prices, will in due course lead to an increase in the consumer price index or retail inflation, the metric the RBI bases its decisions on. A rise in the WPI is also likely to push down the real GDP growth data. That’s because real GDP is calculated by adjusting nominal GDP growth for inflation.
It is not difficult to predict what the RBI will do next. However, there is no such clarity for the NDA government when it comes to fiscal policy. For instance, it could bring down taxes to reduce domestic fuel prices — they have risen back to the December 2014 level when crude oil prices (Indian basket) touched $61.2 a bbl, from $39.8 a bbl in April — but not without hurting the predictability of the tax regime.