Know your inflation

Reserve Bank of India Governor Raghuram Rajan cannot be faulted for repeatedly saying that a retail inflation level of 5.7 per cent is a serious matter that calls for policy attention. What’s worse, there are reasons to believe that this figure is understated because services inflation is not adequately captured ( The Big Story, July 25). It is worth noting that the RBI shifted from wholesale prices to consumer prices as its guidepost for monetary policy not only to get a real feel of inflation for the aam aadmi but also because the former did not include services in its basket. Now, it is apparent that rising costs of education, healthcare, transportation, entertainment, among others, do not fully show up in the CPI. For instance, it can be safely assumed that an annual inflation rate of 4.7 per cent and 5.4 per cent in the case of health and education, respectively, is understated. Medical and education expenses — owing to their largely privatised nature, the widening supply-demand gap, and the information asymmetry between producers and consumers — are rising by at least 10-15 per cent a year. It hardly helps that just 12-13 per cent of our population is covered for these ever-rising health expenses. Accurate data on services inflation is crucial for understanding relative price movements and inter-sectoral terms of trade — particularly since services account for over half the GDP. A situation of adverse terms of trade against agriculture (farmgate food prices rising less than the rest) would lead to a divergence between the living standards of rural and urban populations, with political repercussions.

The Department of Industrial Policy and Promotion is working on a ‘Business Service Price Index’ which will be merged with the WPI. Indices are compiled and “published on an experimental basis” for railways, banking, postal services, telecom; this will also be drawn up for air, road, ports and insurance. There are challenges in data gathering in the case of fragmented sectors such as roads. The Centre must work in close coordination with private research bodies to this end. With respect to insurance, it is harder to calculate price rise when hybrid products — insurance and investment plan rolled into one — are involved.

Allowing free play of competitive forces is the best way to keep prices under check, and the telecom sector is a fine example of that. However, it is important to have sectoral regulators to check malpractices such as cartelisation and mis-selling. Such regulators need better data on prices, production and quality of service to act in the consumer’s interest. Vulnerable, poorly informed consumers are taken for a ride in the health and education sectors because they are devoid of effective regulation. Such information gaps also work against suppliers of services, a majority of whom are actually individuals operating in the informal sector. A market economy with information deficiencies and inadequate institutions hurts both the consumers and the state. It can lead to serious socio-political fallouts.

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