Inflationary pressures muted in 2018-19

by Mahesh Vyas

While inflation has been quite benign in 2018-19 so far, factors impacting inflation have been throwing curve balls. Less than four months into the fiscal year we have experienced at least three mild shocks.

The first was in May when crude oil prices shot up and threatened to run up to USD 80 per barrel or even a lot more. The scare was shortlived and crude oil prices have come off their peak and stabilised at a level of about USD 74 per barrel.

We expect oil prices to rise a bit during the year - to around USD 78 per barrel. Fiscal 2018-19 is likely to end with an average of USD 75 per barrel compared to USD 56.8 per barrel in 2017-18. This is expected to raise CPI inflation by about 30 basis points.

The second shock begins with an increase in minimum support prices of 14 kharif crops. This increase was expected because it was announced in the union budget. Nevertheless, it delivered a mild shock when it was finally announced. The award is handsome but, its delivery is not clear, yet. Save for paddy and cotton the government does not have the capacity to intervene in the other crops sufficiently to deliver its promise of a minimum support price.

Markets do not seem to be enthused with the MSP. Prices of kharif crops continue to remain lower than the MSP even 22 days after the announcement. Prices are lower in spite of a rather erratic monsoon and a substantial 9.3 per cent deficit in kharif sowing compared to the previous year.

It is noteworthy that food prices remain low even in the face of two compelling reasons to rise. First, the MSP is a substantial government nudge or even a push for them to rise. Second, simultaneously, the kharif season looks likely to deliver lower output in 2018 compared to the previous year. Renu Kohli has deduced quite persuasively in the Financial Express on June 21, 2018 [see here] that this reflects poor consumer demand.

Our analysis based on production and post-harvest prices of the past six kharif and rabi seasons show that there is a 37 per cent chance of agricultural prices falling in the post-harvest period and there is a 16 per cent chance that both, production and prices fall.

It is likely that even if sowing and production remains low, in spite of the increase in MSP, kharif crop prices may not rise much. Prices of rice and cotton may rise because the government can intervene in these cases. But, government intervention in the case of other crops is unclear.

Given the political risk in letting prices languish at low levels around now, we believe that the government will intervene to raise prices. In our computations we have assumed that it will intervene in the case of paddy and arhar. If this is true then, the MSP-factor is expected to lead to a 20 basis points increase in CPI in 2018-19.

The third shock is the depreciating rupee. The rupee has depreciated 5.8 per cent since the beginning of this fiscal year. As FPIs keep trooping out with their investments, the rupee looks likely to fall further.

We believe that the pass-through of the effects of a depreciating rupee on inflation would be staggered in 2018-19. Yet, it would be significant. The biggest impact of a depreciating rupee would be seen on intermediate goods such as crude oil, metals and machinery. The share of consumption goods in total imports is of the order of 15 per cent. If we include gold the share goes up to 23 per cent. (This computation is based on the Principal Commodities classification of imports.) The share of these in the CPI is about 15 per cent. If the rupee depreciates by about 7 per cent, assuming low price elasticity of these imports, the impact could be close to 100 basis points.

Arguably therefore, the three inflationary shocks encountered this year so far are not alarming. But, are inflationary pressures building up?

Core inflation (which is consumer price inflation excluding food and fuel & light) has been rising for the past one year. A large part of the increase can be explained by the increase in house rent and by the increases in petroleum product prices. Excluding these, the core inflation (what we may call as the super-core inflation), has increased but not very significantly.

While headline CPI inflation in June 2018 was 5 per cent, the various measures of core inflation were higher. Core inflation was much higher at 6.2 per cent, core-core inflation (which is core inflation excluding vehicle fuels like petrol and diesel) was 5.9 per cent and super-core inflation was at 5.3 per cent.

Compared to a year ago, CPI inflation in June 2018 was up by 3.54 percentage points (up from a very low base of 1.46 per cent to 5 per cent). In a similar comparison, core inflation was up by a smaller 2.22 percentage points, core-core inflation was up by an even smaller 1.98 percentage points and super-core inflation was up by a much smaller 1.56 percentage points.

If we exclude the effects of food, fuels and housing, ie, the super-core CPI is not rising too fast. Further, the recent reduction in GST for a number of consumer goods is likely to have a small impact in keeping the CPI reined in.

We expect CPI inflation to average 5.1 per cent in 2018-19 compared to 3.6 per cent in 2017-18. This would be the highest inflation in four years. However, the increase in inflation this year is largely imported and, yet, benign. It is not a reflection of an increase in domestic demand.

Unemployment Rate
Per cent
6.1 +0.1
Consumer Sentiments Index
Base September-December 2015
100.6 0.0
Consumer Expectations Index
Base September-December 2015
99.7 0.0
Current Economic Conditions Index
Base September-December 2015
98.2 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 17 Dec 17 Mar 18 Jun 18
New projects 1.25 1.51 3.42 2.32
Completed projects 1.25 1.16 1.56 0.91
Stalled projects 0.69 0.88 3.44 0.30
Revived projects 0.34 0.24 0.26 0.22
Implementation stalled projects 0.78 0.71 1.92 0.04
Updated on: 14 Aug 2018 4:20PM
Quarterly Financials of Listed Companies
(% change) Sep 17 Dec 17 Mar 18 Jun 18
All listed Companies
 Income 7.9 12.0 9.7 16.9
 Expenses 9.0 13.0 16.2 20.2
 Net profit -18.0 -14.3 -80.3 5.5
 PAT margin (%) 5.5 4.8 1.2 6.1
 Count of Cos. 4,508 4,503 4,325 2,657
Non-financial Companies
 Income 8.2 13.3 11.1 19.2
 Expenses 8.2 12.4 11.7 21.6
 Net profit -6.0 13.2 1.6 31.4
 PAT margin (%) 6.2 6.4 6.6 7.7
 Net fixed assets 9.2 11.8
 Current assets 2.9 7.2
 Current liabilities 11.0 10.4
 Borrowings 3.4 1.9
 Reserves & surplus 7.9 7.2
 Count of Cos. 3,464 3,471 3,347 2,098
Numbers are net of P&E
Updated on: 14 Aug 2018 4:21PM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 6.0 9.9
 Expenses 5.7 1.9 6.0 13.3
 Net profit 0.1 -9.7 25.8 -37.5
 PAT margin (%) 3.0 2.8 3.5 4.2
 Assets 9.5 10.2 7.5 13.2
 Net worth 8.5 11.3 7.7 12.8
 RONW (%) 5.8 4.9 5.8 5.7
 Count of Cos. 26,178 24,474 22,051 749
Non-financial Companies
 Income 4.9 1.0 5.8 8.5
 Expenses 5.1 0.4 6.1 8.0
 Net profit -9.4 19.9 20.7 6.6
 PAT margin (%) 2.0 2.4 3.0 9.3
 Net fixed assets 13.3 17.9 6.7 27.6
 Net worth 7.0 12.0 6.6 9.7
 RONW (%) 4.6 5.1 5.9 13.2
 Debt / Equity (times) 1.1 1.1 1.0 0.4
 Interest cover (times) 1.9 1.9 2.1 6.2
 Net working capital cycle (days) 66 65 62 8
 Count of Cos. 21,351 20,488 18,371 585
Numbers are net of P&E
Updated on: 12 Aug 2018 11:30AM