Input costs surge, rural economy woes to unleash inflation growth: CRISIL

Rising input costs due to high commodity prices and supply disruptions brought on by the intensification of the second COVID-19 wave in rural India are adding to inflationary pressures

Increase in input costs and supply disruptions in rural economy on account of the second COVID-19 wave are preparing the grounds for surge in inflation during this fiscal, rating agency CRISIL noted in a recent report.

In its base case, CRISIL had projected CPI inflation to moderate to 5 per cent in the current fiscal as opposed to 6.2 per cent in the previous fiscal. This estimation was based on lower food inflation benefitting from the high base of last year and an assumption of normal monsoon.

However, upside inflation risks are clearly growing, the agency said. On top of rising input prices, supply disruptions brought on by the intensification of the second COVID-19 wave in rural India are adding to inflationary pressures, it added.

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Referring to government data, CRISIL noted that wholesale price index (WPI)-linked inflation crossed double-digit level at 10.5 per cent on-year in April 2021 from 7.4 per cent in March, for the first time since 2010.  Meanwhile, CPI inflation moderated to 4.3 per cent in April from 5.5 per cent in March, led by a high base of the previous year.

Surging international commodity prices are intensifying inflationary pressures by raising manufacturing costs, CRISIL stated. While input prices have increased across the board, crude oil, edible oils, metals and minerals, and transportation costs have particularly contributed to the upward inflationary risks.

WPI inflation has surged in double digits in April on-year for items directly linked to these commodities, the agency clarified.

"Crude-linked inflation has risen the sharpest, partly led by the base effect too. Edible oils-linked WPI, moving up since last year, has continued on its upward march. Rising inflation levels in fuel and edible oils and fats, have also directly impacted CPI inflation. The inflation effect in metals and minerals is being felt indirectly in some core CPI components," the agency said.

WPI and manufacturing costs can be seen rising in other segments too, including chemicals, paper and textiles. While falling vegetable prices have kept food inflation in check, edible oils and proteins are rising sequentially.

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The sequential rise in core CPI inflation has been moderate so far. Petrol and diesel prices have been the key inflation drivers of the rise, via raising inflation in the transport and communication sector. Although consumer durables segment has also seen rise in prices, due to its dependency on metals, it holds a small share in CPI basket. In contrast, inflation in the substantial FMCG segment has slowed down.

"Overall, producers are currently bearing a higher burden of rising input costs than consumers. However, as demand revives, these costs can get increasingly passed on to consumers," CRISIL stated.

CRISIL Research projected Brent crude prices to average $58-63 per barrel in 2021 against $42.3 per barrel in 2020. Rising fuel inflation will keep core inflation high through elevated transportation costs, aggravating the inflation scenario.

On the food inflation front, the agency expects global food prices to remain elevated given the global trend, some of which could pass through to India's CPI food basket. Another concern is rural lockdowns during the second wave of COVID-19 infections that have disrupted supply to mandis. Any further rise in rural caseload necessitating further localised lockdowns could slow down mandi arrival rates even more and lead to upward pressure in the coming months, CRISIL said.

The agency also raised concerns over the rising rural core inflation. "A spatial analysis of CPI inflation data shows the sequential rise in rural core inflation was higher than that in urban in April 2021, a phenomenon not seen in the previous 16 months. Noticeably, when the pandemic was largely prevalent in urban areas in April 2020, leading to supply disruptions, urban core inflation had shot up. Rising rural core inflation this time around could be an indicator of a similar phenomenon," CRISIL stated.

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