WPI Index , May 2015 : “Price-Pull” by Supply or Demand

Any price index indicates the average price movement of a fixed basket of goods and services over time. Depending on whether the changes are to be measured in retail, wholesale or producer prices, an appropriate basket of goods and services is chosen.

On 14^th May, the Office of Economic Adviser, Ministry of Commerce & Industry, New Delhi released the WPI Index data for May 2015.

Methodology of Index Calculation

Actual index compilation is done in stages. In the first stage, once the price data is collected, price relative for each price quote is calculated. Price relative is the ratio of the current price to the base price multiplied by 100 i.e. (P1/Po)*100.

In the next stage, commodity/item level index is arrived at as the simple arithmetic average of the price relatives of all the varieties (each quote) included under that commodity. An average of price ratio/relative is used under implicit assumption that each price quotation collected for an item/commodity index compilation has equal importance, i.e., the share of production value is equal.  Whereas if the ratio of average prices is adopted instead, the implicit assumption would be that importance of each price quotation depends on its price level in the base period and all the quantities produced are equal. Since quantities produced at unit level are not equal, the average of price relatives’ method is preferred to arrive at item level index in WPI.

Next, the indices for the sub groups/groups/major groups are compiled and the aggregation method is based on Laspeyres formula as below:

I= ∑ (I_i x W_i) / ∑ W_i

Where,

I = Index numbers of wholesale prices of a sub- group/group/ major group/ all commodities

I_i   = Index of the i^th item / sub- group/ group/ major group.

W_i = Weight assigned to the i^th item of sub- group/group/ major group.

The weights are value weights. Aggregation is the first done at sub-group and group level. All commodities index is compiled by aggregating Major group indices.

WPI Index has three major groups under its portfolio. Those three groups are Primary Articles, Manufactured Products and Fuel & Power. Weight of each group in the calculation of WPI Index is different. Figure I, the Graphical representation of Appendix I, suggests that Manufactured Products holds the most weight (64.97%). Fuel & Power and Primary Articles have weights of 14.91% and 20.12% respectively.

Figure 1 Bifurcation of weight in calculation of WPI index

Data released reflects that the official Wholesale Price Index for All Commodities (Base Year: 2004-05=100) for the month of May, 2015 rose by 1.0 percent to 177.7 (provisional) from 176.0 (provisional) for the previous month.The annual rate of inflation, based on monthly WPI, stood at -2.36% (provisional) for the month of May, 2015 (over May, 2014) as compared to -2.65% (provisional) for the previous month and 6.18% during the corresponding month of the previous year. Build up inflation rate in the financial year so far was 0.91% compared to a build up rate of 0.94% in the corresponding period of the previous year.

Decomposition of the decline in inflation rate would suggest that Fuel and Power group has contributed the most (-10.51%). This steep decline in fuel price is subject to global crude oil scenario. Although inflation rate for Fuel and Power is negative, it has increased compared to previous months. Inflation rates forPrimary Articles and Manufactured productshave declined at the rate of 0.77% and 0.64% respectively. Inflation for both the groups is continuously decreasing since the beginning of this year. Following image would highlight the story.

Figure 2 Rate of Inflation for last six months

One can notice that fluctuation in inflation for Fuel and Power does not reflect in inflation for manufactured products. The plausible reason for it can be the competition which forces manufacturers to absorb this volatility at profit level and do not let it reflect on price.

Appendix I shows the YOY difference of rate of inflation for individual elements. Graphical representation of it is shown in figure 3.

Figure 3 Rate of Inflation (%) comparison YOY

As shown in the figure, blue area is the inflation rate in 2013-14 and the red area shows inflation rate in 2014-15. Inflation rate has shrunk for majority of the items except for few items like onion, non-metallic Mineral products, cement & Lime, pulses etc.

According to this data, potatoes have shown the biggest difference in terms of rate of inflation compared to May 2014. This abyss in rate of inflation is mostly because of bumper production of potatoes in Rabi season. Last year when potatoes faced unprecedented rise in prices, some states sealed their borders for movements of potatoes, creating disruption in the supply chain. Good production in Rabi season also removed such restrictions. This along with production boom in potatoes has shrunk inflation in its case. Reduction in price in potatoes may show up as profits in balance sheets of potato consuming industries like chips makers, food servers etc.

On the other hand, inflation has hiked for onion prices. Although onion production was sufficient, in Madhya Pradesh and Maharashtra unseasonal rains in March and April have damaged the crops. Moreover, demand for onions in the middle-east countries ahead of Ramadan is increasing. This causes demand to rise over supply causing prices to rise.

Wheat prices are rising because of unseasonal rains damaging the quality of harvest and the risk of draught. This might cause the condition where India would have to import it. In case of pulses, according to the findings of the study brought by the Associated Chamber of Commerce and Industry of India (ASSOCHAM) import of pulses in the current fiscal has already crossed preliminary estimates considered by the government.  The demand-supply mismatch of pulses is causing the prices to rise for pulses. Low sowing for important pulses like chana has started north-east line for inflation numbers and it is expected to continue till monsoon picks up. Higher the price of chana goes, the trend suggest that alternates like yellow peas will find their market in India. Yellow peas are much cheaper than chana and are imported from Canada. Production of yellow peasis set to rise significantly in Canada in 2015-16 to match this demand.

Looking at the monthly data in the Primary Articles, it can see that inflation for the food prices is continuously decreasing since the beginning of this year. On the contrary, inflation for non-food items is increasing continuously.

Figure 4 Rate of Inflation for Primary Articles

In non-food items, Soybean prices rose by 15% (highest in the group). As per a report, Madhya Pradesh has seen a 13.1% drop in soybean arrivals in the market compared to that in the previous year while Maharashtra has seen a drop of 32.8% and Rajasthan as much as 48.12%. Soybean farmers relied on wheat sales during January-March to ensure cash flows and decided to hold on to soybean. But unseasonal rain ruined their hope of cash flow from wheat. So farmers chose to wait for supplying soybeans till they get high price of INR 3800-4300 compared to INR 2800-3100 in previous years.

In the IIP report published a few days ago, it was stated that cement production has declined sharply. But Infrastructure development is in demand in India. This high demand with insufficient supply must have caused the cement prices to go upwards.

Looking at manufactured products, sugar prices are falling and since they are input to some industries like the beverage industry, there is a fall in inflation rate in these industries as well (can be observed in Appendix II).

IIP data suggested that the production for wood and wood products rose well (16.2%), still the appreciation in their price may suggest Wood products industry is in demand.

India is leading supplier for black tea in the world. According to estimates, there was a shortfall of nearly 8 million kg of tea in the global market in January and that, in turn, pushed up the prices of Indian tea, according to a section of traders.

Production rise in Paper and Paper products (5.2%) has succeeded to satisfy demand to some extent making inflation to calm down a little (2.25% compared to 2.48% last month).

In the cotton industry, although raw cotton price hiked by 5%, decline in prices of cotton textile inkles the low demand. Nearly 35 percent of the country’s annual textile and clothing production is exported. For this industry, China is a huge market. The fall in demand from china has contributed in decline of inflation for cotton textile industry. In some countries, the average import duty on these products is high and hence, the industry needs support to upgrade technology, improve its efficiency.

Machinery and Machine tools’ inflation rate declined compared to previous month. But huge increase in production of Machinery (20.6%) doesn’t reflect in the decrease in inflation rate (just 0.82%) which shows that demand for them is rising.

In a nutshell, this is mostly the game ‘price-pull’ by demand or supply. Projects like Make in India, SMART cities, Digital India, Infrastructural development etc. would create huge demands for many industries in India. They have to be fed by sufficient supply to maintain price levels. RBI’s monetary policies also play crucial role in controlling inflation. Monetary policies make sure to maintain enough liquidity to lubricate development while making sure that the economy does not soak in too much of liquidity. Deep analysis of these price indexes with prediction of demand and production data will help the Government and the central bank to form policies for betterment of the country.

Appendix

Appendix I

Commodities/Major Groups/Groups/Sub-Groups	Weight	WPI May, 2015	Latest month over month		Build up from March		Year on year
			2013-14	2014-15	2013-14	2014-15	2013-14	2014-15
ALL COMMODITIES	100.00000	177.7	0.66	0.97	0.94	0.91	6.18	-2.36
PRIMARY ARTICLES	20.11815	244.9	1.82	1.28	3.09	2.47	8.58	-0.77
Food Articles	14.33709	253.9	2.34	0.47	4.26	1.85	9.64	3.80
Cereals	3.37323	230.1	-0.04	-0.56	-0.30	-0.43	7.81	-0.13
Rice	1.79348	233.6	1.58	-0.17	2.46	0.00	12.75	-1.77
Wheat	1.11595	213.5	-2.30	-1.34	-4.77	-0.93	3.44	2.79
Pulses	0.71662	284.0	1.00	7.54	1.54	10.16	-0.17	22.84
Vegetables	1.73553	223.5	7.55	2.95	19.25	3.09	0.08	-5.54
Potato	0.20150	135.8	23.03	0.44	46.73	-10.19	37.12	-51.95
Onion	0.17794	312.1	8.82	0.81	6.40	-6.14	-3.46	20.41
Fruits	2.10717	254.9	2.04	-2.93	8.31	4.55	19.45	8.65
Milk	3.23818	249.6	1.34	0.81	1.52	0.93	9.57	6.85
Egg, Meat & Fish	2.41384	292.1	3.58	0.45	2.44	0.69	12.51	0.86
Non-Food Articles	4.25756	213.9	0.88	5.11	0.51	5.58	4.94	-2.24
Fibres	0.87737	209.3	0.98	3.21	-0.38	8.22	8.44	-11.91
Oil Seeds	1.78051	215.4	3.23	4.06	5.12	5.38	4.97	-1.01
Minerals	1.52350	247.7	0.12	0.45	0.14	1.81	8.06	-28.41
FUEL & POWER	14.91021	189.8	0.14	3.04	-0.98	0.96	10.53	-10.51
Liquefied petroleum gas	0.91468	162.9	-0.92	0.00	-2.77	0.12	7.11	-5.18
Petrol	1.09015	173.6	-0.61	8.09	-2.44	5.15	12.28	-11.29
High speed diesel	4.67020	205.3	0.96	4.21	0.48	1.03	14.21	-11.62
MANUFACTURED PRODUCTS	64.97164	154.1	0.32	0.20	0.58	0.13	3.88	-0.64
Food Products	9.97396	171.7	0.70	1.12	2.19	0.94	3.29	-0.64
Sugar	1.73731	172.6	0.11	-0.12	3.49	-1.09	-0.89	-9.06
Edible Oils	3.04293	146.3	-0.14	1.18	-0.41	1.04	-0.82	0.27
Beverages, Tobacco & Tobacco Product	1.76247	203.0	0.10	-0.25	0.97	-0.10	8.45	2.73
Cotton Textiles	2.60526	156.8	1.09	0.00	1.46	-0.57	9.13	-6.28
Man Made Textiles	2.20573	131.1	0.30	-1.50	0.07	-1.13	6.04	-2.96
Wood & Wood Products	0.58744	192.9	-1.11	0.47	-0.27	1.69	6.68	3.21
Paper & Paper Products	2.03350	152.8	0.00	-0.20	1.22	-0.07	6.26	2.28
Leather & Leather Products	0.83509	143.5	-0.41	1.20	-1.16	0.84	4.49	-0.55
Rubber & Plastic Products	2.98697	148.8	-0.20	0.47	-0.07	0.34	5.34	-0.67
Chemicals & Chemical Products	12.01770	150.9	-0.07	0.13	0.33	0.00	4.93	-1.44
Non-Metallic Mineral Products	2.55597	176.9	0.72	-0.39	0.24	-1.01	0.90	5.36
Cement & Lime	1.38646	172.8	0.68	-1.54	-0.18	-2.76	-3.93	5.49
Basic Metals Alloys & Metal Product	10.74785	161.8	0.24	-0.12	-0.42	-0.06	2.39	-3.06
Iron & Semis	1.56301	148.2	0.94	-1.40	1.01	-0.47	3.82	-7.66
Machinery & Machine Tools	8.93148	134.9	0.30	0.00	0.45	-0.07	2.45	0.82
Transport Equipment & Parts	5.21282	137.6	0.07	0.15	0.00	0.22	2.72	1.33

Appendix II

Commodities/Major Groups/Groups/Sub- Groups	Weight (%)	Rate of Inflation for the last six months
		Dec-14	Jan-15	Feb-15	Mar-15	Apr-15	May-15
ALL COMMODITIES	100.00	-0.50	-0.95	-2.17	-2.33	-2.65	-2.36
PRIMARY ARTICLES	20.12	0.29	1.38	1.01	-0.17	-0.25	-0.77
Food Articles	14.34	4.95	8.00	7.83	6.27	5.73	3.80
Cereals	3.37	1.35	1.70	1.13	0.00	0.39	-0.13
Rice	1.79	4.43	4.00	3.28	0.65	-0.04	-1.77
Wheat	1.12	-2.36	-1.63	-2.40	-1.19	1.79	2.79
Pulses	0.72	5.93	12.56	14.50	13.22	15.38	22.84
Vegetables	1.74	-6.41	18.63	15.28	9.27	-1.32	-5.54
Potato	0.20	0.52	-8.01	-5.20	-21.50	-41.14	-51.95
Onion	0.18	-19.70	-3.34	25.96	36.49	29.97	20.41
Fruits	2.11	17.77	16.95	16.84	12.56	14.22	8.65
Milk	3.24	9.41	9.57	7.99	7.48	7.42	6.85
Egg, Meat & Fish	2.41	1.15	-1.26	1.59	2.62	4.01	0.86
Non-Food Articles	4.26	-3.62	-4.16	-5.64	-6.94	-6.18	-2.24
Fibres	0.88	-13.86	-19.06	-22.69	-18.91	-13.81	-11.91
Oil Seeds	1.78	-0.88	0.54	-0.20	-1.26	-1.80	-1.01
Minerals	1.52	-22.73	-30.42	-29.55	-29.58	-28.65	-28.41
FUEL & POWER	14.91	-7.82	-11.02	-14.77	-12.23	-13.03	-10.51
Liquefied petroleum gas	0.91	-3.19	-7.65	-8.86	-7.92	-6.06	-5.18
Petrol	1.09	-11.96	-17.43	-21.80	-17.70	-18.44	-11.29
High speed diesel	4.67	-6.31	-11.43	-17.59	-12.11	-14.39	-11.62
MANUFACTURED PRODUCTS	64.97	1.44	1.05	0.26	-0.19	-0.52	-0.64
Food Products	9.97	1.30	2.02	1.25	0.59	-1.05	-0.64
Sugar	1.74	-1.33	-1.63	-2.20	-4.85	-8.86	-9.06
Edible Oils	3.04	-3.44	-0.41	-0.82	-1.16	-1.03	0.27
Beverages, Tobacco & Tobacco Product	1.76	8.37	3.91	4.06	3.83	3.09	2.73
Cotton Textiles	2.61	0.00	-0.63	-2.47	-4.37	-5.26	-6.28
Man Made Textiles	2.21	0.90	-1.49	-1.71	-1.78	-1.19	-2.96
Wood & Wood Products	0.59	5.29	4.24	2.99	1.23	1.59	3.21
Paper & Paper Products	2.03	4.14	3.70	3.56	3.59	2.48	2.28
Leather & Leather Products	0.84	-0.55	-1.25	-2.34	-2.53	-2.14	-0.55
Rubber & Plastic Products	2.99	0.88	0.13	-0.74	-1.07	-1.33	-0.67
Chemicals & Chemical Products	12.02	1.67	0.46	-0.79	-1.11	-1.63	-1.44
Non-Metallic Mineral Products	2.56	4.26	5.23	5.26	6.69	6.54	5.36
Cement & Lime	1.39	2.73	4.44	5.20	8.29	7.87	5.49
Basic Metals Alloys & Metal Product	10.75	-0.24	-0.96	-2.21	-3.40	-2.70	-3.06
Iron & Semis	1.56	0.13	-2.42	-5.02	-6.29	-5.47	-7.66
Machinery & Machine Tools	8.93	1.51	2.19	1.81	1.35	1.12	0.82
Transport Equipment & Parts	5.21	0.07	0.81	0.96	1.10	1.25	1.33

References

Press Release by Office of Economic Adviser, Ministry of Commerce & Industry, New Delhi, available at http://eaindustry.nic.in

Press Release published by the Central Statistics Office of the Ministry of Statistics and Programme Implementation

http://mospi.nic.in/mospi_new/upload/manual_compilation_index.htm

http://www.thehindu.com/todays-paper/tp-national/tp-tamilnadu/growth-in-export-of-textile-products-may-shrink/article7320722.ece

http://economictimes.indiatimes.com/news/economy/agriculture/with-prices-rising-higher-onions-are-back-to-torment-the-government-and-people/articleshow/47638539.cms

http://www.mydigitalfc.com/commodities/shortfall-output-pushes-tea-prices-worldwide-892

 

About Author

This report is prepared by Monil Shah. He is currently pursuing MBA from Institute of Management, Nirma University and is an Economist at eRT CAPITAL. 

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