Sharp rise in WPI inflation since April, 2021 is not due to the "base effect" but something much more malignant.
The WPI Index was 122.2 in February, 2020, just before the abrupt shutdown ordered by Modi in March 2020. During the 3 month shutdown, it dipped briefly to a low of 117.5 in May, 2020. But by August 2020, the index had recovered to 122 again. Sarkari economists have been explaining away the sharp rise in WPI in terms of a mythical “base effect.” That is simply not true, especially since January, 2021, when the index stood at 126.5.
Meanwhile, WPI inflation has surged from 4% before the pandemic, to 14.2% currently. From May, 2021, the WPI inflation has raged well above 11% continuously for over 7 months. This is not an aberration in numbers. This is a new fact of life, and the sustained divergence between WPI and CPI [the latter hovers around 6%] needs a careful examination.
Incidentally, Govt. have now banned forward trading in Agricultural commodities. This is to curtail price rise. In retrospect, it is abundantly clear that the rush to pass the the 3 farm laws, at the height of the Covid crisis, was nothing but an elaborate scam to help the private trade corner commodities at cheaper prices. As I had then explained in my essay, linked here, agricultural markets are in a new bull market that will last some 10 to 15 years, which will take all prices up. The argument over MSP being unviable is a bogus argument because, international prices of cereals now are some 30% above MSP prices as I had predicted. And will rise further.
The bogus argument over MSP continues. It should be dismissed with contempt.
The real argument is about the private trade’s capacity to handle agricultural output, and its distribution to consumers, fairly and with reasonable efficiency. The answer from Bihar is worrisome, where even after a decade of abolition of public procurement, and continuation of MSP, farmers get 30% lower prices than the applicable MSP.
Two things are necessary to ensure fair trade when it passes into private hands. Firstly there should be a credible MSP, backed by Govt. readiness to procure in bulk, in case private trade fails to buy the quantities available in the market. You cannot have a situation where apples sell for INR 2 per Kg in Kashmir, when the crop became available. Such market failure would be disastrous. Secondly, as the ban on forward trading implies, if you let private trade corner stocks, runaway inflation is inevitable.
So Govt must have a way of disciplining markets. The problem in India is not too much regulation. It is more collusion of Govt. with hoarders to gyp the consumers. The recent history will bear me out.
Meanwhile, I hope the Govt. doesn’t believe its own fairly tales on inflation. The sustained rise in WPI inflation over last 7 months leaves no room for doubt that the real inflation rate is much higher than revealed by the CPI numbers. And plenty o room to doubt if CPI will converge to WPI in due course.
About 40% of the inflation in WPI is accounted for by food and fuel, that add directly to the “core inflation.” Sarkari economists have a habit of explaining away core inflation as irrelevant because it allegedly “converges” into CPI.
Oh well, let us see what happens this time, when people start lining up for salary increases to compensate for runaway inflation. Neither fuel nor food are likely to moderate in price in global markets from current levels. These prices are not aberrant. They are continuation of an interrupted trend from 2008. So these will have to “absorbed” by the economy.
We are currently in the inflation denial stage.
Sonali.
High inflation along with staggeringly high unemployment is distressing. It is time for all political parties to address this. Government is not only tone deaf but tone dumb.
Brilliant and honest essay as usual.
We are populated by economists and policy makers who have no stake in the consequences of their recommendations. They are good, in fact, very good at explaining without any understanding.