More Price indices needed: Financial Express 21st September 2010

There has been quite a bit of hype on the new WPI, which has gone about correcting the data set that will be used to gauge inflation in future (thankfully the weight of sugar and its derivatives comes down from 5.23% to 2.71%). Lots of items have come in, the number of quotations has increased and irrelevant products have been taken out from the calculation. The entire task of collecting prices in India is a challenge given that a large part of our market is unorganised and data is not easily available. Even AGMARKNET has only partial reporting of prices. Let’s see whether or not things have changed significantly.

The new index shows a lower inflation number for August and has generally provided similar numbers in the past against the old series. However, primary products have an upward bias despite the lower weight, while prices of manufactured goods have been lower with a higher weight. Fuel products have more or less been within range with no particular bias. This has actually brought the number down during the last year. Therefore, on the face of it, the new inflation index is progressive as it is theoretically on a stronger footing and depicts similar pictures.

One is however, not quite sure if major lacunae that existed earlier have been plugged relating to the receipt of information. Having more quotations is good as it makes the system robust and this number has gone up from 4.4 to 8.1 per product included in the index with the multiple almost doubling to 15.2 for manufactured products. The issue really is with getting data on a continuous basis with few revisions. The present set of data reporting has been fuzzy and more quotations run the risk of higher levels of under-reporting. Assuming that this has been addressed by the Committee, logically we could have all the three sub-indices on a weekly basis that would make the system more transparent.

A broader issue here is how representative the WPI is of inflation. We have tended to take this number to be sacrosanct and used it for policy formulation on the grounds of this concept affecting our purchasing power. If one looks at the new WPI, just about 52% of the composition actually enters our lives. The rest are more for the producers and actually do not affect us. It is for this reason that we have been looking at food inflation rather than the overall number. In fact, going by NSS data on consumption patterns in 2005-06, which is just one year ahead of the current base year chosen for WPI, around 53% of rural consumption and 40% of urban consumption is on food products. The share of these products in the new WPI is just 24.3%. Quite clearly, we need to distinguish between different inflation indices when looking at specific aspects of policy targeting.

Ideally, the WPI is a policy instrument when looking at growth per se and aspects related to it; while the CPI needs to be looked at closely when talking of standard of living. We still have an anomalous situation today where the monthly WPI inflation rates were 9.8% and 8.5% in July and August, respectively, while the CPI for industrial workers has increased by 11.25% in July. This is the true impact on the consumer as there is a long value chain in the production processes between the first point of sale (wholesale) and the final point of sale (consumer), which can be as high as 5-7 at times that add to the cost as value addition and corresponding margins are built in. Quite evidently, we should be focusing on the CPI and partly on the WPI to the extent that it includes products in the household consumption basket when assessing inflation.

The government is also considering bringing in a price index on services, which is good though, given that most services are in the unorganised sector, there would be issues in getting accurate information. To some extent some of the common services that we use such as transport, communication, education, recreation, medical care etc are included in the CPI. Probably, we could work towards making the CPI a little more contemporary as it has a lag of one month presently vis-à-vis the WPI.

Inflation certainly has come to the forefront of Indian economics in the last year leading to discussion and deliberation, which have been productive. The recent controversy on the GDP numbers based on market and constant prices has also directed attention to the GDP deflator, which would be the ideal inflation indicator that covers all segments albeit at the producer level rather than the consumer level. As the discussion levels are still fresh, this may be the right time to really pursue with the creation of new price indices.