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 InflationQ1

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.

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 India’s 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.

Causes of Inflation in India

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 India’s 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.

Wholesale Price Index (WPI) for the past one year

Inflation over the Past Year

Inflation : Structural or MonetaryCauses? Q2

Structural or Monetary?

• Monetary Inflation: Sustained increase in the money supply of a country.

• Structural Inflation: Strongly influenced by Govt’s monetary policy and economic structure.

• Inflation in India is more structural than monetary.• India’s 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 investorsAccording 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

eminentJob 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

Investment by Multi

Brand Outlets

Increased Competition

Organized Supply Chain

Job CreationIncreased

Disposable Income

Increased Consumption

Inflation Decrease

Source : India Retail Report 2011

SIMPLISTIC VIEW OF IMPACT OF INFLATION

Reduced Waste

Middle Man Cut Out

Increased Income Of

Farmers

Offset of Existing

Distributors

Thank You

Prepared by Abhishek Sharma FT13300

Arjun Choudhry FT13312Garv Sharma FT13325Irene Eltham FT13337

Mrityunjay Arya FT13350Ramachandran FT13362

Sonali Das FT13374Vijaykumar Bale FT13386

Group 4Section S3