Economic Survey 2021-22: Divergence in Retail and WPI inflation to narrow down

31 Jan 2022 , 03:47 PM

The Economic Survey 2021-22 presented by the Union Minister for Finance & Corporate Affairs, Nirmala Sitharaman in the parliament on Monday said that with the gradual waning of base effect in WPI its divergence in WPI and CPI inflation is expected to narrow down.

As per the Survey, retail inflation, as measured by Consumer Price Index-Combined (CPI-C) moderates to 5.2% in 2021-22 (April-December) from 6.6% in the corresponding period of 2020-21. 

The Survey also says effective supply-side management kept prices of most essential commodities under control during the year.

According to the Survey, compared to many Emerging Markets and Developing Economies (EMDEs) and advanced economies, the Survey finds that Consumer Price Index — Combined (CPI-C) inflation in India has remained range-bound in the recent months, touching 5.2% in December 2021. This was possible largely because of the proactive steps taken by the Government for effective supply management.

Retail inflation, well within the target limits of 2% to 6%, declined to 5.2% as against 6.6% during April — December 2020-21. The Survey states that this was largely attributed due to the easing of food inflation. Food inflation, as measured by the Consumer Food Price Index (CFPI), averaged at a low of 2.9% in 2021-22 (April-December) as against 9.1% in the corresponding period last year.

The Survey says that a “refined” Core inflation has been constructed to exclude the volatile fuel items. The items of “petrol for vehicle” and “diesel for vehicle” and “lubricants & other fuels for vehicles”, in addition to “food and beverages” and “fuel and light” have been excluded from headline retail inflation. Since June 2020, refined core inflation has been much below the conventional core inflation, indicating the impact of inflation in fuel items in the “conventional” core inflation measure.

Major drivers of retail inflation have been the “miscellaneous” and “fuel & light” groups. Contribution of miscellaneous increased to 35% in 2021-22 (April — December) from 26.8% in 2020-21 (April — December). According to the Survey, within the miscellaneous group, a subgroup of “transport and Communication” contributed the most, followed by “health”. On the other hand, the contribution of food & beverages declined from 59% to 31.9%.

Further, on WPI inflation, the Survey mentions that the indicator has shown an increasing trend and has remained high during the current financial year touching 12.5% during 2021-22 (April — December). The Survey describes that part of the high inflation could be because of a low base in the previous year as WPI inflation has been benign during 2020-21.

The Survey observes that the Crude petroleum & natural gas subgroup under WPI has witnessed very high inflation and stood at 55.7% in December 2021. Within manufactured food products, edible oils were a major contributor.

The Survey attributes a host of factors for the divergence witnessed between the two indices. Some of them, amongst others, include the variations due to base effect, the conceptual difference in their purpose and design, the price behaviour of the different components of the two indices and lagging demand pick up.

The Survey states that with the gradual waning of base effect in WPI its divergence in WPI and CPI inflation is expected to narrow down.

On the long-term perspective, the Survey states that given the importance of supply-side factors in having a predominance in the determination of inflation in India, certain long term policies are likely to help. This includes changing production patterns which would lead to diversification of production of crops, calibrated import policy to address uncertainty and increased focus on transportation and storage infrastructure for perishable commodities.