State of the Economy Report: RBI

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    • Recently, the State of the economy report was released by the RBI.

    Major Highlights of the Report

    • Retail inflation: It has gone up to 6.95 per cent. Food and beverages inflation was the main driver rising to 7.5 per cent from 5.9 percent.
    • Inflation risks: Surge in commodity prices is already posing inflation risks, especially through the conduit of surging imports.
      • WPI inflation jumped to a high of 15.55 percent.
    • India is facing high inflation, widening trade deficit and foreign portfolio investment outflow.
      • These conditions are expected to hamper growth and lead to rocketing inflation.
    • Accommodative policy: While the RBI kept the repo rate unchanged, it has initiated the process of normalisation of the accommodative policy.
      • An accommodative stance indicates that the central bank is prepared to expand the money supply in order to boost economic growth.
    • Globally: Crude oil prices rocketed to a 14-year high.
      • Prices of base metals such as nickel, palladium and aluminium, for which Russia is a key exporter have surged.
      • Prices of food items such as edible oil and cereals have also been pinched hard following the war.
      • The impact has been felt across the board impacting countries such as the United States, United Kingdom, Brazil, India and Russia.

    Implications

    • Rising input costs for products such as fuel, metals and chemicals have pushed up wholesale prices, a proxy for producer prices.
      • This is adding to pressure on retail prices.
    • It presents a peculiar problem for policymakers
      • The hole between the 2 metrics persevering with for a prolonged interval factors to lingering market inefficiencies, triggered, partially, by the COVID-induced impression on the producer stage.
      • The rise in CPI inflation, with no cooling off in sight, signifies a shift from the historic pattern where the wholesale inflation sometimes collapses in the direction of shopper inflation.
    • The gross non-performing assets (NPAs) of MSMEs or loans defaulted by these enterprises rose significantly.
    • The wiping out of many small firms: handed increased pricing power to larger manufacturers, and this resulted in price increases despite falling product volumes.
      • In industrial sectors: such as automobiles that were already facing increased commodity prices, reduction in the number of MSME suppliers handed the ability of commanding higher prices to the remaining component makers.

    Relation between the wholesale price and the retail price

    • The difference essentially is that the WPI tracks only basic prices devoid of transportation cost, taxes and the retail margin, etc. WPI pertains to only goods, not services.
    • So, the WPI basically captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator (the ratio of the value of goods an economy produces in a particular year at current prices to that of prices that prevailed during the base year).
    • Despite this, the WPI-inflation far exceeding the CPI-inflation serves as a signal for retail prices to rise further going forward.

    Wholesale Price Index (WPI)

    • It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
    • It is published by the Office of Economic Adviser, Ministry of Commerce and Industry.
    • It is the most widely used inflation indicator in India.
    • The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.

    Consumer Price Index (CPI)

    • A comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy.
    • It is released by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI).
    • Four types of CPI are as follows:
      • CPI for Industrial Workers (IW).
      • CPI for Agricultural Labourer (AL).
      • CPI for Rural Labourer (RL).
      • CPI (Rural/Urban/Combined).
    • The  base year for CPI is 2012.
    • In 2020, the Ministry of Labour and Employment on Thursday launched the new series of CPI for industrial workers (CPI-IW) with a new base year of 2016.

     

    Key Suggestions

    • Strength: India faces these challenges from a position of strength built on broadened vaccine coverage, financial sector resilience, robust export and remittances and fiscal reprioritization to spur capital spending on infrastructure.
    • Spurring private investment: remains a key thrust area for sustaining growth on a durable basis.
    • The third wave seems to be behind: with the removal of all curbs, alongside a broadening of vaccination, economic activity is returning to speed.
    • Most sectors are reaching or have exceeded pre-pandemic levels: Bank credit has gathered pace and the job market is gathering steam.
    • Growing GST collections: Is an indicator of growth in the segment of the economy that collects the tax.

    Source: IE