Inflation in India - Overview

Dr Rangarajan Chairman, (PMEAC), on inflation in India:

In other countries, the growth rate is low, but at the same
time inflation is also low. Whereas in our country, while growth
is slowing, inflation remains at a high level.
Inflation Rate WPI (May 2012): 7.55%
Inflation Rate CPI (May 2012) : 10.36 %
All time high (Sept 1974): 34.7%
Record low (May 1976) : -11.3

Nature & Causes of

Inflation
Q1

Nature of the Inflation

Supply Shock (Cost-Push):
Agricultural production in India has not grown in
proportion to the growth in Population, thus creating a
supply shortage.
India has seen a rise in prices of Raw Materials and wage
rates and a shortage of Natural resources This has caused
the Price level (cost of goods) to increase.
Food prices rose 10.49% in April with the price of
vegetables surging ahead at more than 60%.
Fuel and electricity inflation rose to 11.03% in April
compared with 10.41% in the previous month.

Causes of Inflation in India

Rise in Food Prices:
In May food prices rose an annual 10.74% compared to 8.25% in
the year-ago period.
Nature of the Agricultural Industry:
For e.g. this year Karnataka, Maharashtra and Andhra Pradesh
have had poor rains, which is crucial for the cultivation of pulses.
Prices of Pulses contribute 0.72% of Indias Inflation.
Supply Bottle Necks:
Inflation is often attributed to supply bottlenecks such as in food
distribution, where an estimated one third of fresh produce is
wasted.

Rise in fuel prices:

Rise in petrol prices significantly effects the CPI of the country and
rise in diesel prices effects inflation as a whole.
Oil is our No.1 Purchase (Import), with a 31% commodity share
for 2010-2011 (Economic Times, 7 July 2012). Therefore, it has a
strong bearing on our trade deficit.

Trade deficit and the Depreciation of the rupee:

Because of the steady decline of the rupee, import costs are
rising. This creates the need for subsidies. Increasing subsidies
adversely affects Indias fiscal deficit and makes it harder to
tackle inflation.
Political Instability:
The Coalition government struggles to push forward with reforms
in the face of a strong opposition, much to the frustration of
investors who abandon the idea of investing in India. Lack of
Investment, means lack of growth, further fuelling the supply
shortage and rise in prices.

Inflation over the Past Year

Wholesale Price Index (WPI) for the past one year

Inflation : Structural
or Monetary
Causes?
Q2

Structural or Monetary?
Monetary Inflation: Sustained increase in the money
supply of a country.
Structural Inflation: Strongly influenced by Govts
monetary policy and economic structure.
Inflation in India is more structural than monetary.
Indias economy is dotted by structural imbalances in
various sectors.
Major sectors contributing to inflation are Agriculture,
Manufacturing,services and Fuel.
Bottleneck in supply side ,slump in production,decline
in agriculture growth are all major causes for inflation
in india.

 The graph shows a very high correlation between

repo rate and growth in WPI and IIP.
As per the graph, the constant rise in rates has been
adversely affecting the industry as the cost of
borrowing has increased, investments have dried up
and profit margins have taken a hit.

In the case of food inflation, as the repo rate is increasing,

the growth rate also is increasing.
Major Contributor to food Inflation is protein rich foods
like milk, pulses, eggs, fish etc.

 With the change in purchasing power, the trend of food

consumption has shifted from carbohydrate rich foods to
protein rich foods.
In the case of pulses,the problem is compounded by the
fact that India is the single biggest consumer and only a
handful of other countries produce in quantities that
India demands.

Can Organized retailing

in India reduce the
Inflation?
Q3

India: Goldmine for retail investors

According to the A T Keaney Global Retail Development Index Report 2011 / 2012,

India is has a great opportunity for organized retailing because:

Vast Population of approx 1.2 Billion with fast Labor force growth.
Rapid Urbanization
High Savings and Investment rates giving more purchasing power to Consumers
Accelerated retail growth of 15 to 20 percent .
Low Organized Retail penetration of about 5% to 6 % indicating room for growth.
Changes in foreign direct investment (FDI) regulations favouring various international
retailers' entry and expansion plans.

Impact of FDI : Structural/Institutional

Inclusion of 51% foreign direct investment in multi-brand retail
Attract global supermarkets, such as Walmart, Tesco and Carrefour (Min
FDI - $100 million (Rs 450 crore)

Impact

Urban Retail
Market

Rural Retail Market

Local Small
Retailer

Local Big
Retailer

Supply Chain
Localized

Increased
Competitiveness
Product
Differentiation
Price Wars

Increased Penetration of
Markets
Backward and Forward
Linkages to Kirana Shops,
Local Farmers, Local
Stores in Villages

Harder to
Compete
Sales Based on
-Convenience
-Competitive
Pricing

Harder to
Compete
Impetus to
innovate
Brand War
eminent

Job Creation /
Offset

Training Institutes
& other ancillaries
Employment for
Middle / Upper
Class
Offset : Medium
Size Retailer

Agriculture best practices

Transportation &
Administrative Jobs
Offset : Local
Supermarket store will
face severe competition

Indirect
competition
minimal impact

Direct
competition
impact
eminent
Survival of
the fittest

Warehousing /
PDS

Inclusion of multi brand stores will lead to localizing the supply chain & pds system will
be impacted parallelly, adding best practices for supply chain management

IMPACT of FDI : Inflation Rate

Offset of
Existing
Distributors

SIMPLISTIC VIEW OF IMPACT OF INFLATION

Investment by
Multi Brand
Outlets

Increased
Competition

Source : India Retail Report 2011

Organized
Supply Chain

Reduced
Waste

Middle Man
Cut Out

Job Creation

Increased
Disposable
Income

Increased
Income Of
Farmers
Increased
Consumption

Inflation
Decrease

Thank You
Group 4
S3