What does WPI at 0% mean?

Following the news of inflation on the Wholesale Price Index (WPI) dipping to 0%, Swarajya sought reactions from a few citizens who keep a tab on the country’s economic affairs.

Shailesh Vora, chartered accountant, Mumbai

There is hardly any decline in the index of Primary Article Segment and the Manufactured Article Segment as compared to the corresponding indices in November 2013. They remain more or less stagnant in spite of high weights of 20.12% and 64.97% given respectively in the WPI calculation. Although I consider decline or stagnancy in Primary Article Segment to be an achievement, stagnancy in the index of the manufactured products indicates stagnancy in growth as well.

 The main contributors have been fuel and power, which together have a weight of only 14.91%. This parameter is curious. The index for this group declined by 5.4%―199.3 from 210.7―for the previous month due to lower price of furnace oil (13%), high speed diesel (10%), aviation turbine fuel (8%), petrol (5%) and kerosene (3%).

 First, low Primary Article Price Index is indeed an achievement, as it reflects internal control measures by the government at various levels, low liquidity measures by the Reserve Bank of India (RBI) and the fact that cautioned traders are avoiding over trading.

I attribute low Manufactured Products Index to low growth, cautioned entrepreneurship and high lending rate of interest maintained by the RBI. Most of the large corporate houses are busy in restructuring exercises. Investments in micro, small and medium enterprises (MSME) have been diverted to real estate and other non-productive assets.

Finally, a major contribution has come from power and fuel sectors, which has happened mainly due to the low international prices of crude oil and appreciation of the Indian rupee against most currencies; the US dollar is an exception

 Pankaj Jangid, co-founder and product manager, Optimizory Technologies, Delhi

I attribute the dip to government actions. First, it came down heavily on hoarders of essential items. They used to control prices of food items with a long shelf life to a very large extent. Second is the emotional pitch for “Make In India”. While I am not sure how this can be measured, instead of investing into commodity, business houses are now looking at investment opportunities in manufacturing. This has had an effect on commodity prices for sure.

 Thirdly, a foreign affairs turnaround has resulted in Japanese, Russian, Chinese, American and Australian investments—or at least pledges thereof—creating a positive atmosphere that has a bearing not only on the stockmarket but also on traders who now believe the years of scarcity are now over; they are hence not hiking the prices in anticipation of short supply.

 Further, the government’s investigation into black money stashed abroad as well as that circulating in India might have pushed some money into the white market. Finally, the plummeting of crude oil prices has been a major factor reducing fuel prices constantly.

 Supratim Basu, independent investment professional, Mumbai

The WPI is a largely meaningless and useless statistic to us (consumers). It is an indication of producer-to-producer pricing. Further, food inflation remains high—it will also moderate due to the base effect and the corn/ ethanol subsidy linkage to oil in the US. In India, focus must be on the Consumer Price Index (CPI). The RBI rate policy has long been predicated on CPI and not WPI.

 As Indian consumers and extensive savers, we should want deflation and not even low inflation as we have been indoctrinated to believe—inflation only benefits the government and bureaucrats. The rest of us are hung out to dry. We must demand sound money and zero deficits, and no printing of money by the RBI.

 Thankfully we have Raghuram Rajan, one of the smartest market economists in the world as the RBI governor—if anyone can put India on the path of sound money, he can.

 Mukul Goel, commodity trader, NOIDA

Much of the energy space can be attributed to be down owing to international prices, but the domestic fall in prices of foodgrains, fruits, vegetables, sugar and other commodities is due to sentiments generated by—and supported by—the new government’s policies and seemingly incorruptible behaviour.

 Under the UPA government, almost every month the price of milk was raised; since 16 May this year, we have not witnessed any price rise in milk and other dairy products; in fact, some private players have reduced the prices. I have no hesitation in saying that the new government has done enough to contain the prices.

 Deepak Sharma, software engineer, iOS developer and entrepreneur, Gurgaon

It is just impossible for any government to control inflation or bring it down so quickly on its own. A government or central bank anywhere in the world has used two tools to combat inflation: raise interest rates and introduce price controls. The first measure can take a toll on growth and the second never works in the long run. I am yet to see a case study across the world where a government has successfully curbed the phenomenon called inflation

 Amitayu Sengupta, commentator on economic affairs, New Delhi.

The main problem of the Indian economy was actually stagflation, with the slowdown of manufacturing coupled with rising price levels. Inflation can be caused by demand pull or cost push.

While the former is necessary to maintain investment levels, the second demands better macroeconomic policy management to reduce essential costs so as to ensure that profitability is not affected.

We had been having more of the second type of inflation, which is leading to stagnating tendencies. The real problem has been continuous inflow of foreign capital—even when real economic activities have been decreasing, leading to higher liquidity in the system that is reflected in terms of prices.

Under the present economic regime, you cannot afford to have any slowdown or outflow in foreign capital as it will totally debase your currency once it starts to flow out. The herd mentality of finance capital means that if once a destination is deemed unsuitable, you have massive flocking out.

But if real economic activities are slowing down, where does this investment come in to? The answer is speculation, expecting prices to rise further so that you can make a profit out of it. This, in turn, means that this inflation has to be maintained to ensure steady capital flows.

The slowdown of inflation then not only threatens a possibility of actual economic stagnation, but the rapid outflow of capital that might follow can also render our currency weakened, which would be a double whammy for the economy.

Like it or not, the next Budget needs some serious government interventions to take the economy out of this danger zone. The news of WPI-based inflation dipping to 0% is fraught with the risk of rapid outflow of foreign capital unless real economic activities kickstart very fast.

Compilation of views by Surajit Dasgupta.