Wholesale Price Index (WPI) vs.

Consumer Price Index (CPI)

An ordinary citizens view

This issue has been highlighted by the issue raised by Dr. Subramaniam Swamy
first salvo against Dr. Raghu Ram Rajan in connection with the reduction of
interest rates.
Dr. Raghu Ram Rajan has moved the focus of alignment of interest rate structure
with WPI as the focal point earlier to CPI.
India has been in the recent past been experiencing an intriguing situation the
WPI has been in reducing and in negative territory while the CPI have been in the
positive territory and on one way street for a significant period of time. Dr Swamy
does not see the merit of this shift in focus.
Here is an ordinary citizens view
Essential Basics
INCREASE IN EXCISE DUTY ON PETROLEUM PRODUCTS

WPI has been in negative territory since the commodity prices have been
coming down, with crude oil being the major driver along with the reduced
demand from China, impacting steel amongst other commodities.
The government in India has collected additional revenues by increasing the
excise duties to maintain the petrol and diesel prices. And these duties are
not available for MODVAT. Under the proposed GST Bill also, no set off
would be available to begin with against the petroleum products and liquor.
Hence there is increase in the WPI and there is a matching increase in CPI.

INCREASE IN SERVICE TAX BY 2% AND OTHER CESSES

The service tax rate has been hiked by 2% - and this is available for
MODVAT.
MODVAT means the manufacturer or the service provider can adjust the
service tax paid against the service tax collected. Thus the increase in the
Service tax has little impact on the WPI, while for the consumer the price
goes up with the increase in service tax rate.
Thus while at the WPI level, there is insignificant impact of the increase in
the service tax, while at the CPI level there is an increase. Result a
divergence in the trends of the inflation monitors.

IMPACT OF THIS DIVERGENCE

While the EBITDA of the companies has been going up please see the
business reports on stocks the consumer inflation has been going up.

Kanwal Jit Singh Pune India.

Do not look at the top line (sales) growth that is coming down as prices are
coming down (WPI is negative). Look at the margins at which the companies
operate they are increasing.
http://economictimes.indiatimes.com/markets/stocks/earnings/corporateebitda-to-rise-but-revenue-will-lag-crisil/articleshow/51779271.cms
Will an interest rate reduction impact this? Yes it will increase the
profitability of the companies marginally as compared to their current
margins, except for the highly leveraged companies. A 1% decrease in
interest will increase the highly profitable company by less than 0.1% in my
estimate. Even for a highly leveraged infrastructure company, the impact on
the bottom line will be less than 0.5%.
http://www.livemint.com/Companies/ny8WpQMe9LES9vpdFciVKI/Debtcontinues-to-weigh-down-Indias-top-conglomerates.html
Resolving structural issues is the key to their health. Interest rates
downward revision will not provide any significant value, other than brownie
points on the stock market that too temporarily.

ELECTRICITY SECTOR

All of us in the urban areas and many in the rural sector are using
electricity.
The price of electricity at the Electricity exchange has come down this is at
WPI level WPI is negative.
Has the price of electricity at the consumer level decreased over the past two
years? It has increased. CPI is positive
Delhi CM is right in demanding audit of Electricity distribution companies
it should happen across the country.

http://www.thehindu.com/business/indian-energy-exchange-iex-says-powerprices-will-remain-depressed/article7993169.ece
The price of power will remain depressed for the rest of the year and even beyond, as
capacity addition continues to outstrip demand, Rajesh Kumar Mediratta, Director, Business
Development, Indian Energy Exchange (IEX) said.
We operate on the price-discovery model and since November 2014 we have noticed a
decrease in prices. This trend will remain through this year and perhaps for some time,
he told reporters.
According to latest available IEX data, the market price of power dropped to Rs 2.85 /kwh
on an average between April and November 2015 compared with Rs 3.51 /Kwh in 2014-15.
Over the last five years about 80,000 MW capacity has been added but demand has grown
by only 30,000 MW in this period creating a big demand-supply gap
The lower prices have brought generators under pressure as they were able to recover only
their operating costs and their plant load factors were dropping, he said. Discoms were
trying to make use of the cheap power.

Kanwal Jit Singh Pune India.

http://timesofindia.indiatimes.com/city/mumbai/State-power-distributor-plans-55-rate-increase/articleshow/52752648.cms

Increase in power tariff by 5.5% over the next 4 years.

To me addressing this gap is the key to early revival of the economy. There
are several structural gaps that are in the system which apparently are not
in the focus area of anyone in power.
Addressing this issue will give more benefits to the country than an interest
rate reduction. The senior citizens and employees have opposed the
reduction proposed in the GPF rate in the recent past the Government had
to roll it back.
http://indianexpress.com/article/business/epf-interest-rate-raised-to-8-8-percent-from-8-7-per-cent-2776496/
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Kanwal Jit Singh Pune India.