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Inflation Rate Keep fluctuating In India, Ahead Of Festival Season

The retail inflation rate in India saw a slight decrease from 5.6 per cent in July to 5.3 per cent in August. This is due to food price inflation falling to 3.11 per cent from nearly 4 per cent in July.

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The inflation rate in India is witnessing continuous fluctuations, amid the ongoing pandemic and disturbance in the export-import diaspora, because of the economic crisis in Sri Lanka, and the Taliban takeover in Afghanistan. 

The retail inflation rate in India saw a slight decrease from 5.6 per cent in July to 5.3 per cent in August. This is due to food price inflation falling to 3.11 per cent from nearly 4 per cent in July. 

However, several economists have warned that inflationary risks are still there and could dampen the fervour for festive spending as inflation in sectors like health which is 7.8 per cent, transport and communication which is 10.2 per cent fuel and light is almost 13 per cent remains high. 

According to government data, India's Wholesale Price Index (WPI) in August rose to 11.39 per cent as compared to 0.41 per cent in August 2020. 

Speaking on India's Wholesale Price Index (WPI) in August, Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said, "WPI inflation, which has a high weightage of manufactured products, has a significant linkage to the global commodity price cycle. The global commodity price cycle has been on an upswing and much of the increase in manufactured products is a reflection of that which is showing up in elevated WPI inflation. There is also an unfavourable base effect which is also statistically pushing up the inflation levels."

The Ministry of Commerce and Industry explains that the high rate of inflation in August is because of the rising prices of non-food items like mineral oils; crude petroleum and natural gas, basic metals,  food products like textiles, chemicals, and chemical products, etc.

Meanwhile, the food inflation was -1.29 per cent in August while fuel and power inflation was at 26.09 per cent, which is up from 26.02 percent in the previous month, as per data released by the ministry. 

Rakshit said, "Much of the drop in food inflation is due to cereals and fruits and vegetable prices seeing a sharp decline from last year’s levels. The impact of lockdowns on supply chain disruptions has been much lower which is feeding into lower inflation levels. On the other hand, fuel and power is a combination of higher crude prices and a sharp increase in government taxes from last year."

India's retail inflation in August marginally eased to 5.3 per cent, staying within the Reserve Bank of India's comfort zone for a second month. Talking about the major reason that food prices are soaring high, Rakshit said, “Food prices are increasing in some specific items such as pulses and oilseeds and certain vegetables. Some of it is due to global prices such as edible oils and partly due to supply issues.”

Taliban take over Afghanistan, and Indian market: 

There are a variety of dry fruits like high-quality almonds, black grapes, pine nuts, anjeer, apricots, and spices such as saffron, cloves, and elaichi that India imports from Afghanistan. Since Kabul fell and trade got halted, India is facing a shortage of several items as consumption is increasing. 

The price of Mamra almonds from Afghanistan has gone up to 3,800 in August which was Rs 2,100 per kg in July and the price of pine nuts and apricots has almost doubled. The price of Kabul black grapes has gone up to Rs. 780-800 which was Rs 38-400 per kg a month ago.

Praveen Khandelwal, National General Secretary, Confederation Of All India Traders, said, "Uncertainty of the government in Afghanistan, absence of final trade and commerce policy in connection with international trade and regulation of supply of material by big players in view of ensuing market demand, the prices tend to rise. We have a good production of many items produced in Afghanistan. The Government should try to boost distribution channels of these items within our country."

The price rise at present is just a temporary phenomenon. Soon the traders of India will reorganize their sourcing policy. The rate in our country will stabilize, Khandelwal added. 

Rural India and inflation: 

The Fast-moving Consumer Goods (FMCG) have been helping the economy get out of recession, amid the pandemic. However, a key challenge has been the rise in costs of products that were necessitated due to the rise in input costs and a drop in Out of Home consumption. Across most categories, there are various ways FMCG companies have been managing this challenge to their profitability due to cost escalation. 

Akshay D'Souza, Chief of Growth and Insights, Bizom - The Retail Intelligence Platform said, "Many product sales are dependent on Out of Home consumption and with the pandemic, some of that demand moved to at home. As a result, brands in Chips, Biscuits, Personal care, etc decided to decrease pack sizes slightly (to improve their volume realization) without a drop in end user prices. This so that the price rise compensates for volume drop in these categories." 

A key example is the chips packet that today has a lot more air than wafers inside as compared to a few years back. However, in a free market economy, consumers are driven by choices and consumers can choose which products to buy based on preference. So this is less damaging and will regulate itself, D'Souza mentioned. 

"The costs of many commodities like edible oil, milk, wheat, sugar, etc affect the cost of a lot of consumer products as these are vital ingredients for their production. In particular, the edible oils have seen a manic increase in prices (40-90 per cent) across different types of oils and this is affecting end-user consumption as well as driving up inflation. To drive rural consumption, we need to have better control over these and while the government is trying to reduce duties on these products, much more is needed here to ensure India's consumption story doesn't suffer, D'Souza added. 

Unlocking cities after the second wave: 

As cities are almost unlocked after that deadly second wave of Coronavirus, India is hoping to bounce back. The pandemic restrictions imposed by the government also affected business activities, which had a direct or indirect effect on the high inflation rate. 

"Restrictions on business are much more relaxed than during the first wave. However, there will be some amount of supply frictions till the situation is more normalized. But unlike last year, inflation should be much more under control as supply-led distortions are much more benign," Rakshit said. 

High prices ahead of the festive season: 

The entire country is bracing for big festivals. Talking about high prices, as far as purchasing many items is concerned.

Rakshit said, "There is a fair amount of savings that is available at the upper end of the consumer pyramid which will likely keep the festive demand buoyant. However, the risks will be of a muted pent-up/festive demand this year than last year as most purchases were available as usual through the second Covid wave.

Retail inflation as measured by the CPI is likely to soften in 3QFY22 as food prices inflation trends lower. However, some upside could be visible in services, especially contact-based services as demand improves on the back of vaccinations.

"There will be some pass-through of high raw material prices but the overall impact on retail inflation may not be too high. There will be pockets of high and sticky inflation even as the overall inflation will likely trend lower," Rakshit added.