India's price index confounds consumers

By Saurav Jha
Column: The Estranged Analyst

Published: September 22, 2009

Kolkata, India — Food prices in India have risen by 20 to 40 percent in the past few months, yet newspapers are reporting that the economy is witnessing negative to low inflation. Ironically, what is reported as “headline inflation” does not really measure the impact of prices on consumers. And with forthcoming changes in the way the indicator is determined, it will do so even less.

India is revising the way it determines its key inflation indicator, the wholesale price index, from October. Since it is practically impossible to determine the average change in prices of all the goods and services traded in an economy, a sample set or basket of goods and services is used to get an indicative figure. In India, a comprehensive review of the basket of commodities whose prices determine the index is underway.

For the first time, “services” are likely to be included in the index, reflecting the importance of their contribution to India’s gross domestic product. The existing WPI is calculated by comparing current prices with those in 1993-1994; this will be replaced by a new base year, 2004-05.

While the inclusion of services will reflect a larger share of education and health in the Indian consumption basket, it could lead to a decline in the weight assigned to food items, which in turn would lead to the WPI further underestimating food price inflation.

The wholesale price index, as the name suggests, measures wholesale and not retail prices faced by consumers. While presently it takes into account the prices of 435 commodities, over the years the percentage of food items used to determine this index has been declining, including the weight assigned to them. In October, the weight accorded to primary articles will see a significant decrease from the current 22.02 percent to around 10 percent.

The new series will also see a significant increase in the weight for manufactured products, to around 80 percent from the current 63.75 percent.

It is therefore no wonder that food prices and the WPI have been out of step. Nevertheless, the Indian government continues to prefer the WPI for policymaking to indexes that give far higher weight to consumption and are calculated for retail prices. These are the various consumer price indexes, which are essentially cost-of-living indexes. There are four of these - CPI industrial workers; CPI urban non-manual employees; CPI agricultural laborers; and CPI rural labor. Unsurprisingly, each of these indexes has shown consistent double-digit growth in the recent past, even as the WPI showed negative movement.

Since these indexes capture retail consumer woes more adequately, from time to time there has been a demand to use CPI measures as indicators for policy rather than the WPI. Proponents of this view have pointed to the widespread use of the CPI across the world as the key inflation index and have noted India to be one of the few exceptions.

Indeed, even India’s National Statistical Commission recommended in 2001 that all four existing cost-of-living indexes be aggregated into a single CPI as a policy indicator. However, this proved to be much easier said than done. Consumer price data proved difficult to compile and, minus an overhaul of India’s statistical bureaucracy, there is significant time lag between final compilation and data gathering.

The WPI is reported weekly with a time lag of a fortnight, while CPI figures are compiled on a monthly basis with a lag period of a few months or more. Moreover, given the dualistic nature of the Indian economy, the four CPI indicators are not as similar as they seem and consolidating them may prove difficult.

While all these factors can be overcome, the truth is probably that the government does not want to abolish the WPI. Indian policymakers continue to be hooked on the idea of “core inflation,” which basically refers to the inflation of manufactured products. It is this measure that is used to determine monetary policy in India.

In fact, the inclusion of services in the WPI basket will make sense from the production side of things, since it will help assess the impact of inflation on the “production of services.” As recently announced by Finance Minister Pranab Mukherjee, India plans to draw up a producers’ price index by modifying the present WPI, rather than moving toward a comprehensive consumer price-based measure.

The point remains, however, that India cannot have a catchall index as the WPI was once thought to be. It is clear that Indian policymakers believe that food price inflation is caused by supply-side factors and does not address monetary policy in any significant way.

It is easy to criticize the seeming conservatism of the Indian establishment in relying on the WPI, but it must be noted that India continues to be an economy in transition, with wide disparities. As and when the economy develops and the populace becomes richer, it is expected that services will hold an even more significant place in both the production and consumption baskets.

Also, the number of middlemen between wholesale and retail markets will be progressively reduced, leading to less divergence in price movements at the wholesale and retail levels.

Maybe then India will adopt a consumer-based price index as its primary informant for policymaking. However, until that day arrives, consumers in India can safely avoid reading the section of the newspaper that informs them of the inflation rate.

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(Saurav Jha works as an independent consultant in the energy sector in India. He is consulting editor of India Power magazine and author of a forthcoming book on nuclear power. He can be contacted at sjha1618@gmail.com. ©Copyright Saurav Jha.)

This article first appeared here

UAE aircraft stirs turbulence in China-India relations

By Saurav Jha

Column: The Estranged Analyst

Published: September 15, 2009

Kolkata, India — The five-day detention by Indian authorities of a United Arab Emirates Air Force plane, impounded at Kolkata Airport on Sept.6, has created another ripple in Sino-Indian relations and embarrassed the UAE into the bargain. The aircraft, bound for China, was found to be carrying weapons that had not been declared to customs officials.

The UAEAF C-130 Hercules had made a routine refueling stop at Kolkata Airport en route to the city of Xianyang in central China. When Indian customs officers conducted an equally routine inspection of the plane’s cargo hold, they found weapons in crates marked “combat missiles.” Worse, the crew had failed to declare the cargo to authorities in the mandatory customs declaration form.

The crew was detained for interrogation by Air Intelligence in India, where one of the crewmembers reportedly confessed to failing to notify authorities of the presence of weapons on board.

The aircraft was released on Sept.10 after the UAE government said that the act of omission happened due to a “technical error,” and apologized.

Initial reports had suggested that the plane’s undeclared cargo, marked as combat missiles, contained U.S.-origin weapons. Other reports later hinted that harpoon anti-ship missiles procured by the UAE and Egypt were being moved to China secretly.

This speculation of course sits well with the long-held belief that certain Middle Eastern countries act as procurement fronts for China with respect to Western equipment, as China has faced an arms embargo by Western countries since the 1989 Tiananmen Square massacre.

The arms embargo forced China to rely increasingly on Russian imports and their subsequent reverse engineering to keep its arsenal contemporary. However, China’s interest in Western advances in weaponry did not diminish, and clandestine methods for sourcing such arms were resorted to.

Indeed, prima facie, the quantum of arms purchased by states such as UAE, Egypt and Pakistan seems disproportionate to their requirements and financial capability. This leads one to suspect the presence of an offshore entity for their grand arms purchases from Western suppliers. The needle of suspicion points rather strongly to China, given the special relationship it shares with each of these states.

However, the Chinese themselves seem to have declared that the arms being ferried on the UAE plane were of Chinese origin and were exhibits at a recent arms show in Abu Dhabi. Furthermore, a Chinese analyst, piqued at the prospect of Indian authorities examining their military equipment, declared it an act of wanton espionage.

China’s Global Times quotes Dai Xu, described as a Chinese military expert, saying, “The actions by Indian authorities violated diplomatic rights as the cargo on board belongs to China. Any inspection on board, which may have violated China’s property rights and constituted spying on its military secrets, should be approved by both the UAE and China.”

It must be noted that of late several articles taunting India on its relative position vis-à-vis China have appeared in the Chinese media. There has even been “an Internet paper” – really a diatribe – written by another elusive Chinese analyst calling for the balkanization of India.

It seems Beijing has taken Track II diplomacy to a whole new level by carefully choosing its words at the official level while simultaneously allowing state-run mouthpieces to let it rip on India. However, Indian media have raised grave concerns and the Indian public has not taken very kindly to these musings by unofficial Chinese commentators.

The UAE could certainly have done without the incident, especially at a time when the crown prince of Abu Dhabi, Mohammed bin Zayed, is doing the rounds of Washington, lobbying for legislative approval of a 123 agreement on civilian nuclear cooperation with the United States. Signed at the end of former U.S. President George W. Bush’s administration, the nuclear agreement is slated to pass around Oct. 17, unless there is Congressional action blocking it.

Several U.S. lawmakers have expressed concerns over the UAE’s lack of export controls. Lawmakers in the United States are more concerned about weapons proliferation to Iran. There have been instances in the past where China and Iran have collaborated in clandestinely obtaining banned systems, like the secret procurement of AS-15 Kent cruise missiles from the Ukraine. This has subsequently been reverse engineered by the Chinese in the form of the DH-10 land attack cruise missile.

China’s dealings with India seem to be a mix of diplomatic hectoring and force posturing along the disputed border. The Indian establishment so far seems to have maintained its equanimity in diplomatic terms because China policy in India continues to be guided essentially by a politico-bureaucratic set up.

The Chinese government would do well to note that any further escalation, at least in the perception of the Indian establishment, may lead to the Indian military being given a far greater say in Sino-Indian relations. That may not look good on the curriculum vitae of a “peacefully rising” power.

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(Saurav Jha works as an independent consultant in the energy sector in India. He is consulting editor of India Power magazine and author of a forthcoming book on nuclear power. He can be contacted at sjha1618@gmail.com. ©Copyright Saurav Jha.)

This article first appeared here