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Inflation in India - OverviewDr Rangarajan Chairman, (PMEAC), on inflation in India:“In other countries, the growth rate is low, but at the sametime inflation is also low. Whereas in our country, while growthis slowing, inflation remains at a high level.”Inflation Rate WPI (May 2012): 7.55%Inflation Rate CPI (May 2012) : 10.36 %All time high (Sept 1974): 34.7%Record low (May 1976) : -11.3
Nature of the InflationSupply Shock (Cost-Push): • Agricultural production in India has not grown in proportion to the growth in Population, thus creating a supply shortage. • India has seen a rise in prices of Raw Materials and wage rates and a shortage of Natural resources This has caused the Price level (cost of goods) to increase. • Food prices rose 10.49% in April with the price of vegetables surging ahead at more than 60%. • Fuel and electricity inflation rose to 11.03% in April compared with 10.41% in the previous month.
Causes of Inflation in IndiaRise in Food Prices:In May food prices rose an annual 10.74% compared to 8.25% inthe year-ago period. • Nature of the Agricultural Industry:For e.g. this year Karnataka, Maharashtra and Andhra Pradeshhave had poor rains, which is crucial for the cultivation of pulses.Prices of Pulses contribute 0.72% of India’s Inflation. • Supply Bottle Necks:Inflation is often attributed to supply bottlenecks such as in fooddistribution, where an estimated one third of fresh produce iswasted.
Rise in fuel prices:Rise in petrol prices significantly effects the CPI of the country andrise in diesel prices effects inflation as a whole.Oil is our No.1 Purchase (Import), with a 31% commodity sharefor 2010-2011 (Economic Times, 7 July 2012). Therefore, it has astrong bearing on our trade deficit.
Trade deficit and the Depreciation of the rupee:Because of the steady decline of the rupee, import costs arerising. This creates the need for subsidies. Increasing subsidiesadversely affects India’s fiscal deficit and makes it harder totackle inflation.Political Instability:The Coalition government struggles to push forward with reformsin the face of a strong opposition, much to the frustration ofinvestors who abandon the idea of investing in India. Lack ofInvestment, means lack of growth, further fuelling the supplyshortage and rise in prices.
Inflation over the Past YearWholesale Price Index (WPI) for the past one year
Inflation : Structuralor MonetaryCauses?Q2
Structural or Monetary? • Monetary Inflation: Sustained increase in the money supply of a country. • Structural Inflation: Strongly influenced by Govt’s monetary policy and economic structure. • Inflation in India is more structural than monetary. • India’s economy is dotted by structural imbalances in various sectors. • Major sectors contributing to inflation are Agriculture, Manufacturing,services and Fuel. • Bottleneck in supply side ,slump in production,decline in agriculture growth are all major causes for inflation in india.
• The graph shows a very high correlation between repo rate and growth in WPI and IIP.• As per the graph, the constant rise in rates has been adversely affecting the industry as the cost of borrowing has increased, investments have dried up and profit margins have taken a hit.
In the case of food inflation, as the repo rate is increasing,the growth rate also is increasing.• Major Contributor to food Inflation is protein rich foods like milk, pulses, eggs, fish etc.
• With the change in purchasing power, the trend of food consumption has shifted from carbohydrate rich foods to protein rich foods.• In the case of pulses,the problem is compounded by the fact that India is the single biggest consumer and only a handful of other countries produce in quantities that India demands.
Can Organized retailingin India reduce theInflation?Q3
India: Goldmine for retail investorsAccording to the A T Keaney Global Retail Development Index Report 2011 / 2012,India is has a great opportunity for organized retailing because:• Vast Population of approx 1.2 Billion with fast Labor force growth.• Rapid Urbanization• High Savings and Investment rates giving more purchasing power to Consumers• Accelerated retail growth of 15 to 20 percent .• Low Organized Retail penetration of about 5% to 6 % indicating room for growth.• Changes in foreign direct investment (FDI) regulations favouring various internationalretailers entry and expansion plans.
Impact of FDI : Structural/Institutional • Inclusion of 51% foreign direct investment in multi-brand retail • Attract global supermarkets, such as Walmart, Tesco and Carrefour (Min FDI - $100 million (Rs 450 crore)Impact Urban Retail Rural Retail Market Local Small Local Big Market Retailer RetailerSupply Chain • Increased • Increased Penetration of • Harder to • Harder toLocalized Competitiveness Markets Compete Compete • Product • Backward and Forward • Sales Based on • Impetus to Differentiation Linkages to Kirana Shops, -Convenience innovate • Price Wars Local Farmers, Local -Competitive • Brand War Stores in Villages Pricing eminentJob Creation / • Training Institutes • Agriculture best practices • Indirect • DirectOffset & other ancillaries • Transportation & competition – competition • Employment for Administrative Jobs minimal impact –impact Middle / Upper • Offset : Local eminent Class Supermarket store will • Survival of • Offset : Medium face severe competition the fittest Size RetailerWarehousing / • Inclusion of multi brand stores will lead to localizing the supply chain & pds system willPDS be impacted parallelly, adding best practices for supply chain management
IMPACT of FDI : Inflation Rate Offset of SIMPLISTIC VIEW OF IMPACT OF INFLATION Existing Distributors Reduced Middle Man IncreasedInvestment by Waste Cut Out Income Of Increased Organized Farmers Inflation Multi Brand Competition Supply Chain Decrease Outlets Increased Increased Job Creation Disposable Consumption Income Source : India Retail Report 2011