Positive WPI means a return of pricing power: Aditi Nayar, ICRA

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor, ET Now and Aditi Nayar, Senior Economist, ICRA, discuss the positive impact of WPI inflation. Edited excerpts

ET Now: This is the first time that a jinx has been broken for this particular month. I do not know whether that is a trend in the making but do you have a positive take on WPI inflation?

Mythili Bhusnurmath: Well absolutely. It is interesting that you call it a jinx. In the past, we would call it a positive WPI because inflation has always been a bugbear in India but we have reached the situation where a negative WPI is treated as a jinx. So that is one real big positive apart from the positive on the WPI itself moving into positive territory but we will have to wait and see whether Saugata’s prediction on the WPI moving back into negative will also hold in which case perhaps we should not draw too much “comfort” from the positive WPI. We will have to wait and see what the internals are. I see the primary articles inflation at 2.34 per cent is not very much higher than what it was in March. As far as primary articles are concerned, we are in safe territory. We will have to wait and see what the manufacturing inflation number is to see whether some of that excess capacity has really been taken care of.

ET Now: That number has come in at 0.7 per cent versus a minus take in the month of March of 0.13. So there has been quite a big jump on that front as well?

Mythili Bhusnurmath: Well yes it would seem to suggest that some of the excess capacity is easing out and as we see the OROP and the Seventh Pay Commission recommendations kicking in, may be there will be more demand for manufactured articles particularly consumer durables. This will see manufactured products inflation move up and hopefully corporates will start investing because the macroeconomic picture is far too complicated. It is not as if there is a one to one relationship but to the extent that there was excess capacity, you are not going to see corporates invest. So we can start with prima facie some good news but we will have to see how it plays out.

ET Now: Aditi, are these numbers pretty much on expected lines in the sense that largely the market was going where the high WPI number in the April is reading?

Aditi Nayar: These are a little bit higher than what our base line projection was because we had pencilled in a minus 0.3 per cent and I think both the numbers that you have mentioned so far are a little bit higher -- both on the manufactured side as well as the primary articles side. I think what we are going to see now is that with the manufactured goods, there could be some passing through of some of the tax related changes post the budget and secondly since beginning of the fiscal year, some amount of price changes. But overall, I would say that if the bulk of this increase in manufactured products is coming in from the core side and not from the food side of manufactured products -- which includes things like sugar -- then perhaps we can start to say that there is some amount of pricing power which is coming back in anticipation of the OROP and the pay commission funds boosting consumer demand to some extent.

Mythili Bhusnurmath: What does the the positive number for WPI mean in terms of the GDP deflator? Remember, the negative number for WPI that we had was really complicating tasks as far as the GDP deflator is concerned. So can we hope that this will perhaps address some of the problems that we were seeing, some of the conflicts that we were seeing because of the negative GDP deflator and the entire controversy about what the GDP is, what the deflator is, will that get addressed as a result of this if the positive trend continues?

Aditi Nayar: Absolutely, if the positive trend continues and at least from Q1 FY17 we should be back in a more normal sort of world that we are used to being in where the GDP deflator is positive and nominal GDP growth is higher than real GDP growth. And then perhaps a lot of the other high frequency nominal indicators that we are used to tracking will make more sense or be more in sync with the real GDP growth numbers that come in with a lag. This certainly would help to settle some part of the controversies that have been there for the last 12-15 months ever since the new GDP series came out.

Coming back to what the immediate term outlook for monetary easing would be, I think in conjunction with what we have seen yesterday from the IMD that the monsoon onset is going to be somewhat delayed, that plus both the WPI and the CPI ticking up, I think the likelihood of any easing in the June policy has really ebbed away. Particularly as far as the monsoon onset is concerned, like you said right now the drought conditions are fairly severe in a number of districts and that is perhaps going to intensify some of the pricing pressures that we have seen in April through the rest of May as well.

If we have got a one week kind of a delay in the onset in Kerala, that does not mean that the progress across the rest of the country is going to be delayed by an equivalent number of days. But of course, some impact would be there. And if these extremely dry conditions continue over a large part of June, that will be of a concern. Of course, it would be a short-term concern which would then go away once the rains actually cover a significant part of the country, but nonetheless I think in the immediate term, it is perhaps better to err on the side of caution and I do think that there is a very slim chance left of any rate easing in the June policy.