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Of Inflation, WPI and CPI
Highlights
Inflation is a rise in prices of several items over a period of time. It is measured through various indices and each provides specific information about the prices of items that it represents.
Inflation is a rise in prices of several items over a period of time. It is measured through various indices and each provides specific information about the prices of items that it represents. The index could be the Wholesale Price Index (WPI) or the Consumer Price Index (CPI) for specified categories of people like agricultural workers or urban non-manual employees. Each of the indices is created in a specific manner with a certain year as the base year and they consider the price change over a year.
An index used for measuring inflation comprises several items having different weightage and hence the index moves according to the price changes in these items. For an individual, the various quoted price indices are usually not an exact measure of the inflation that they are witnessing because their spending will not match exactly with the inflation index composition. More important, the consumers' expenditure basket will not be adequately represented by a price index because items like education fees or various services that they avail of are usually not a part of the price index.
A rise in prices of several items means that the input prices for production of various goods and services are rising. In these cases market analysts and fund managers will always consider the net impact on the margin of the entity that they are tracking.
While there might be an increase in the input prices, it has to be considered in the backdrop of the company's ability to pass on the price hike to the end-user. If a company is able to sustain its profit margin despite high inflation, the stock price is likely to hold. If the high inflation sustains, at some stage it will lead to a chain reaction across the economy, pushing up interest rates and even affecting demand. An increase in interest rates will push up borrowing costs for corporates while lower demand will hurt growth in revenues. This is likely to impact sentiment for the stock market as a whole.
An average or normal monsoon means rainfall between 96 and 104 % of a 50-year average of 89 centimeters during a fourth month season from June, India’s weather office reports. Rainfall below 90% of the average is considered a drought. The monsoon season starts with the arrival of the rains on the southern Kerala coast around June. Its progress triggers planting of summer crops.
After hitting south coast, it takes about a week to cover the coffee, tea and rubber growing areas of south India. It spreads to the rice areas of eastern parts in the first 10 days. It usually covers half of the country in the first fortnight and enters the oilseed- producing areas of central India in the third week of June. Cotton areas in the western region get rains by the first week of July. Half of India’s farm output comes from crops planted during the first half of the June-September.
The monsoon rains are vital for farm output and economic growth in India, the world’s second biggest producer of rice, wheat, sugar and cotton. Farm sector shares for about 15% of India’s nearly $2trillion economy, Asia’s third biggest. Monsoon rains impact demand for gold in India, the world’s top consumer of the metal, as purchases get a boost when farming income rise amid high crop output.
India is largely self-sufficient in major food grains such as rice and wheat, but drought can send the country to global markets. In 2009, India had to import sugar, sending global prices to record highs and pushing up inflation. A stronger economic outlook can lift sentiment in equity markets, mainly of companies selling products in rural areas,including consumer goods and automobiles.
In the new era Modi and Monsoon will shape future course of stock market. The current bull run in the market is viable, probably starting to see inception of booming market as predictions pageant a secured government.
M- Modi or Monsoon is important in shaping the market. Today’s market, after election, stable government will instill confidence among the investors.
India is unequal society .Services make 57% of GDP and 25% of workforce. More, the services sector has consistently grown at rates faster than overall GDP.
Agriculture makes 17 % of the GDP, where it employs two-thirds of the workforce. Manufacturing makes rest of the GDP. It employs eight-nine per cent of the workforce (again, the exact split between services and manufacturing varies depending on the definition of construction).
A market looking for any excuse to go into another phase of euphoria has responded strongly. Typically, a good monsoon is associated with some of the following factors.
• One, food inflation remains under control, of all-round benefit to the economy.
• Two, rural consumption rises, benefiting fast-moving consumer goods and white goods makers and, to some extent, cement companies, as construction picks up.
• Third, two-wheelers and tractors tend to do well due to semi-urban and rural buying. Of late, mobile handsets and other electronic items' sales have also seen a correlation to strong monsoon performance.
• Fourth, fertilizer companies tend to do well.
If monsoon performance is indeed trending towards the normal, this will offer a useful boost to economic growth. Sales of tractors and two-wheelers have been in a trough for a while and a revival of demand could mean a huge jump in profits across these segments. The fertiliser sector is more difficult to assess due to the extremely complex subsidy mechanism and the dependence on gas as feedstock. But the biggest advantage could be low food inflation if this is true. In that case, the central bank would actually be in a position to contemplate rate cuts, since food inflation makes 48 per cent of the Consumer Price Index basket.
By most estimates, India will have to create employment for a million (10 lakh) a month for 10 years. Ideally, India will have to find ways to accelerate the movement of the surplus workforce out of agriculture and into manufacturing or service sector employment. This would be the most practical way to induct a vast workforce, at best semi-skilled.
Till this shift, the economy remains heavily dependent on a good monsoon for a boost to sentiment. In particular, semi-rural and rural consumption is largely driven by agriculture and that is driven by good rain. Not only the aggregate rain is important; but the timing too.
This year has seen disappointing projections on the monsoon front. An El Niño effect has been noted and that is usually associated with deficient rainfall in India. But the latest projections say the monsoon will be normal or near-normal in rain and also the timing will not be delayed.
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