Impact: Negative (Inflationary Tendency)
Brief: CPI posting 3.8% in September, 2018 is nearly 10 bps lower than our own very non-conservative expectation for the month. This tendency has led us to believe that the supposed undershooting of the consumer inflation is because of the higher weight attributed to food articles. A redistribution of the index is therefore a need of the hour.
Despite the September CPI number
breaking the downward trend, we believe that inflation will likely be below the
RBI's estimate of 4.8% for H2 FY19.
CPI posting
3.8% in September, 2018 is nearly 10 bps lower than our own very
non-conservative expectation for the month.We were expecting the overall consumer inflation to post 3.9%
considering the fact that higher oil price and fall in value of Indian rupee
will import inflation. However, given a 6% growth in crude prices between
August and September (MoM), transmission seems to be very low. It must be
considered here that base for both these months, under consideration are
constant at nearly 3.3%.
There are several reasons for
this outcome and obsolete weightage tops the list. The CPI is essentially a
combination of Headline and Core inflation numbers. While the former further
comprises of Food & Fuel prices, the latter contains all other items, which
are essential in a household's basket (representing both discretionary and
non-discretionary spending). As food prices remain perpetually low, the
Headline component's representation of a total of 45.9% in the overall consumer
index is adding to the uneasiness.
A sub-category level trend shows that while
core inflation stood at 5.6% during the said period, food inflation as a
standalone metric stood at just 1.1%. This tendency has led us to believe that the
supposed undershooting of the consumer inflation is because of the higher
weight attributed to food articles. Food items accounting for 39% in India's overall
consumer inflation basket strengthens our hypothesis.
If
we compare India's CPI weightages to that of its BRICS peers, the disparities
become starker. As mentioned, while India's food basket has been allocated
nearly 39%, the category's share is only 25.5% and 19.1% in Brazil and South
Africa, respectively. While it is understood that both these contemporaries are
termed upper middle income countries as compared to India's classification of
lower middle income, the latter is fast approaching that target. This is
because India has been averaging a GDP growth of 7.5% (over a period of ten
years) as compared to the other two, averaging less than 3%.
Considering
this, what is confusing is the fact that while India's per-capita Income is
growing at 5.8%, the price of food articles is growing at below 2% in the
country. It is evident that through the effective implementation of the MSP
regime and bettering logistic support, India may have controlled its food
inflation substantially. Price control of seasonal fruits and vegetables (along
with high growth protein based items is recent past) is therefore overwhelming
other categories, which are more inflationary but represent a lower weightage.
Items
such as Housing, Amusement/ Recreational expenses, Consumer Durables, FMCG and
Transportation have gained in prominence over time but continue to represent a
lower weightage in the overall price index. We believe this must change and
weightage of the Indian consumer price index must represent the evolving ground
realties of the Indian economy. A redistribution of the index is therefore a
need of the hour.
Category wise Weight Distribution:
India | Brazil | South Africa | |
Food | 39.06 | 25.52 | 19.15 |
Household items | 3.8 | 4.25 | 4.33 |
Housing | 10.07 | 15.5 | 22.55 |
Transportation | 8.59 | 18.49 | 14.74 |
Clothing | 5.58 | 5.99 | 4.04 |
Health & personal care | 9.79 | 11.1 | 1.26 |
Personal expenses | 1.68 | 10.62 | 4.86 |
Education | 4.46 | 4.71 | 2.34 |
Communication | # | 3.82 | 2.62 |
Others | 10.13 | * | 24.11 |
Overall Index | 100 | 100 | 100 |
Source: MOSPI, BCB, Statistics South Africa, Acuité Research
Note: # indicates weight for communication is included in transportation, * indicates weight for that segment included in other categories.
India's Annual Inflation:
General | Food | Fuel & light | |
FY13 | 10.05 | 11.07 | 9.67 |
FY14 | 9.38 | 12.09 | 7.67 |
FY15 | 5.83 | 6.36 | 4.21 |
FY16 | 4.91 | 4.88 | 5.27 |
FY17 | 4.52 | 4.23 | 3.29 |
FY18 | 3.59 | 1.8 | 6.2 |
FY19 YTD | 4.33 | 1.8 | 7.2 |
Source: MOSPI/CSO, Acuité Research