Soaring input costs, rural economy woes to trigger inflation growth: CRISIL

Rising input costs and supply disruptions in the rural economy due to the second wave of COVID-19 are setting the stage for a surge in inflation this fiscal year, the agency noted. CRISIL rating in a recent report.

In its baseline scenario, CRISIL projected CPI inflation to moderate to 5% in the current fiscal year from 6.2% in the previous fiscal year. This estimate was based on lower food inflation benefiting from last year’s high base and a normal monsoon assumption.

However, upside inflation risks are clearly increasing, the agency said. In addition to rising input prices, supply disruptions caused by the intensification of the second wave of COVID-19 in rural India are adding to inflationary pressures, he added.

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

Soaring international commodity prices are intensifying inflationary pressures by increasing manufacturing costs, CRISIL said. While input prices rose across the board, crude oil, edible oils, metals and minerals, and transportation costs particularly contributed to upside inflationary risks.

WPI inflation jumped to double digits in April year on year for items directly related to these commodities, the agency said.

“Crude-linked inflation rose the most, partly also driven by the base effect. The WPI linked to edible oils, up from last year, continued to rise. inflation in fuels and edible oils and fats has also had a direct impact on CPI inflation The effect of inflation in metals and minerals is felt indirectly in some basic components of the the CPI,” the agency said.

WPI and manufacturing costs may also increase in other segments, including chemicals, paper and textiles. While lower vegetable prices helped contain food inflation, edible oils and proteins are rising sequentially.

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The sequential rise in core CPI inflation has been subdued so far. Gasoline and diesel prices were the main drivers of higher inflation, via higher inflation in the transport and communications sector. Although the durable consumer goods segment also saw a rise in prices, due to its dependence on metals, it holds a small share of the CPI basket. By contrast, inflation in the substantial consumer packaged goods segment slowed.

“Overall, producers currently bear a greater burden of rising input costs than consumers. However, as demand picks up, these costs may be increasingly passed on to consumers,” said the CRISIL.

CRISIL Research has forecast Brent crude prices to average $58-63 per barrel in 2021 from $42.3 per barrel in 2020. Rising fuel inflation will keep underlying inflation high thanks to high transport costs, worsening the inflation scenario.

On the food inflation front, the agency expects global food prices to remain high given the global trend, some of which may spill over to India’s CPI food basket. Another concern is rural closures during the second wave of COVID-19 infections which interrupted the supply of mandis. Any further increase in the number of cases in rural areas requiring further localized closures could slow mandi arrival rates even further and lead to upward pressure in the coming months, CRISIL said.

The agency also expressed concerns about rising core inflation in rural areas. “A spatial analysis of CPI inflation data shows that the sequential rise in rural core inflation was higher than that of urban inflation in April 2021, a phenomenon not seen in the previous 16 months. Notably, when the pandemic was widespread in urban areas in April 2020, causing supply disruptions, urban core inflation soared. could be an indicator of a similar phenomenon,” CRISIL said.

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