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
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