Nature of the Inflation
Supply Shock (Cost-Push):
Agricultural production in India has not grown in
proportion to the growth in Population, thus creating a
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 India
Rise in Food Prices:
In May food prices rose an annual 10.74% compared to
8.25% in the year-ago period.
Nature of the Agricultural Industry:
For e.g. this year Karnataka, Maharashtra and Andhra
Pradesh have had poor rains, which is crucial for the
cultivation of pulses. Prices of Pulses contribute 0.72% of
Supply Bottle Necks:
Inflation is often attributed to supply bottlenecks such as in
food distribution, where an estimated one third of fresh
produce is wasted.
Rise in fuel prices:
Rise in petrol prices significantly effects the CPI of the
country and rise in diesel prices effects inflation as a whole.
Oil is our No.1 Purchase (Import), with a 31% commodity
share for 2010-2011 (Economic Times, 7 July 2012).
Therefore, it has a strong bearing on our trade deficit.
Trade deficit and the Depreciation of the rupee:
Because of the steady decline of the rupee, import costs are
rising. This creates the need for subsidies. Increasing
subsidies adversely affects India’s fiscal deficit and makes it
harder to tackle inflation.
The Coalition government struggles to push forward with
reforms in the face of a strong opposition, much to the
frustration of investors who abandon the idea of investing
in India. Lack of Investment, means lack of growth, further
fuelling the supply shortage and rise in prices.
Inflation over the Past Year
Wholesale Price Index (WPI) for the past one year
Measures in terms of Price Index
Personal Consumptions Price Index Consumer Price
Personal Consumptions Price Index : Average increase in
prices for all domestic personal consumption.
The PCE rises about 1/3% less than the CPI, a trend that
dates back to 1992. This may be due to the failure of CPI
to take into account substitution.
Consumer Price Index : Measures prices of a selection of
goods and services purchased by a “typical consumer”
Formula for calculating Inflation Rate:
(CPI2 – CPI1) __________ * 100. CPI1
E.g. For USA, inflation rate = (211.080 –
202.416)/202.416 = 4.28 %
Other Widely Used Price Indices
Cost of Living Indices
Producer price indices
Commodity Price Indices
Core Price indices
Other Widely Used Price Indices
1. GDP Deflator
2. Regional Inflation
3. Historical Inflatio
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
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
• 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
Can Organized retailing in India
reduce the Inflation?
India: Goldmine for retail investors
ACCORDING TO THE A T KEANEY GLOBAL RETAIL
DEVELOPMENT INDEX REPORT 2011 / 2012,
INDIA IS HAS A GREAT OPPORTUNITY FOR ORGANIZED
• 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 INTERNATIONAL
RETAILERS' 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)
• Price Wars
• Increased Penetration
• Harder to
• Backward and Forward • Sales Based on
Linkages to Kirana
Shops, Local Farmers,
Local Stores in Villages
• Harder to
• Impetus to
• Brand War
Institutes & other
• Employment for
Middle / Upper
• Offset : Medium
• Agriculture best
• Transportation &
• Offset : Local
Supermarket store will
face severe competition
• Survival of
• Inclusion of multi brand stores will lead to localizing the supply chain & pds
system will be impacted parallelly, adding best practices for supply chain
IMPACT of FDI : Inflation Rate
SIMPLISTIC VIEW OF IMPACT OF INFLATION
Source : India Retail Report 2011