Wholesale Inflation in India: Food Prices Drive Increase
Source and Citation: Originally reported in the Economic Times on January 16, 2024
Analysis for Layman
The Wholesale Price Index (WPI) based inflation in India, which measures prices at the wholesale/bulk trade level, increased to 0.73% in December 2023 from 0.26% in November 2022. This rise was primarily driven by a surge in food articles inflation to 5.8%, fueled by increased costs of cereals, vegetables, and pulses.
In contrast, manufactured product inflation continued to remain negative at -0.7%, suggesting that pricing pressures are mostly supply-oriented, and input costs are under control. Experts predict that wholesale inflation is not expected to rise significantly further in this fiscal year due to easing global commodity rates.
Impact on Retail Investors
For retail investors, the trends in WPI suggest that inflationary conditions are improving at the wholesale trade level, although food prices remain a pressure point. This aligns with the Reserve Bank of India’s (RBI) current shift in focus back towards sustaining growth over inflation after six successive rate hikes in 2022.
However, the persistence of food inflation trickling through to consumers warrants caution on the mid-term consumption outlook. Investors should monitor upcoming Rabi crop harvests and global food/fertilizer price movements over 1-2 quarters while making allocation decisions across rate-sensitive investments.
Impact on Industries
Moderating commodity and input costs signal potential earnings cushion for manufacturers, FMCG (Fast-Moving Consumer Goods), and chemicals players over the next few quarters, aiding margins alongside hopes for demand recovery. However, consumer food companies may continue facing margin pressures if agricultural commodity costs remain elevated due to crop damage risks.
For banks, the potential improvement in the transmittability of policy rate cuts to lending rates becomes possible without deposit rate reductions if inflation eases. This could support net interest margins alongside loan book growth. However, vigilance on asset quality cannot be ignored if the growth slowdown persists.
Long Term Benefits & Negatives
Over the longer term, a decline in WPI inflation, especially if sustained at sub 2-3% levels, significantly aids real income growth across weaker sections while supporting the RBI’s accommodative monetary policy. This, in turn, fuels economy-wide consumption demand on a structural basis.
However, the volatility of food inflation risks exacerbating inequality further, requiring supply-side legislative reforms in agriculture marketing, storage, and distribution. Policymakers need to avoid complacency on inflation management and ensure that enacted reforms see effective implementation. Policy stability remains key.
Short Term Benefits & Negatives
In the near term, a seasonal winter ease in wholesale prices offers interim relief for stretched working capital cycles, particularly across micro-businesses. However, sustaining this beyond seasonal trends requires monitoring before concluding optimism.
Global recessionary pressures continue to weigh on broader industrial activity in sectors like metals, minerals, and energy. Lagged pass-through to end consumers also persists across processed categories.
Above all, the RBI’s guidance on policy trajectory hangs over the inflation trajectory in the short term. Both manufacturers and consumers await clarity before firming up spending trends.
Company Impact Analysis: Wholesale Inflation Rise in India
Indian Companies Gaining:
- Consumer Staples Companies: Continued elevated food inflation could benefit companies like Hindustan Unilever, ITC Ltd., Britannia Industries, as consumers might shift towards more affordable packaged food options.
- FMCG Companies with Diverse Product Portfolios: Diversified companies like Nestle India, Dabur India Ltd., Marico Ltd. might be better positioned to navigate fluctuating prices across different product categories.
- Logistics and Warehousing Companies: Increased demand for efficient storage and distribution solutions due to potential supply chain disruptions could benefit companies like Blue Dart, Mahindra Logistics, AGS Transco .
- Agritech Companies: Rising food prices could incentivize investments in technology solutions for agriculture like precision farming, disease resistance, and yield optimization, potentially benefiting companies like Agro Tech Foods, Saheli Omnitec, Stellapps Services.
Indian Companies Potentially Losing:
- Restaurant Chains and Food Retailers: Higher food costs could squeeze profit margins for companies like Jubilant FoodWorks, Devyani International, Yum! Restaurants India, potentially leading to price hikes or reduced profitability.
- Small and Medium Enterprises (SMEs): Higher input costs arising from inflation could put pressure on the margins of SMEs in various sectors, potentially impacting their growth and profitability.
- Companies Reliant on Imported Commodities: Industries heavily reliant on imported commodities like metals, oils, and chemicals could face cost pressures, impacting companies like Reliance Industries, Tata Steel, JSW Steel.
Global Companies Gaining:
- Commodity Trading Companies: Continued fluctuations in global commodity prices could create opportunities for trading houses like Cargill, Glencore, Louis Dreyfus to profit from market movements.
- Agricultural Technology Companies: Global agriculture-focused technology companies offering solutions for improved yield, efficient logistics, and risk management could see increased interest from Indian players.
Global Companies Potentially Losing:
- Companies with Exposure to Indian Consumer Spending: If rising inflation dampens consumer spending in India, it could impact global brands and companies with significant exposure to the Indian market.
Disclaimer: This analysis is based on limited information and should not be considered financial advice. Please consult a qualified financial professional before making any investment decisions.