Comments
As the inexorable inflation in the country has been hogging headlines, authorities in general and the central bank in particular have at long last realised the advisability of sticking adamantly to the wholesale price index (WPI) as the thrust for policy-making.
The announcement on Friday by the Central Statistical Organisation (CSO) with a new series of Consumer Price Indices for All-India and States/UTs separately for rural, urban and combined for the purpose of price comparison effective from January 2011 is a salutary start to the measurement of inflation more seriously.
Hitherto, the country has a plethora of inflation indices which came in the way of not adopting a full-fledged inflation targeting framework with the RBI Governor, Mr Subbarao, bemoaning that “we have one wholesale price index and four consumer price indices”.
While it is scarcely a secret that the WPI measures changes in prices of goods and represents only 45 per cent of the economy, in a predominantly services sector economy where the tertiary sector's contribution is half of the country's gross domestic product (GDP), the exclusion of this component in the WPI so far has rendered measurement of inflation none too transparent. The consumer price index (CPI) is the best understood and recognised measure of inflation the world over.
A new monograph jointly made by Messer Ila Patnaik, Ajay Shah and Giovanni Veonese on behalf of the National Institute of Public Finance & Policy (NIPFP) contends that the overall CPI is purported to signify the cost of a representative basket of goods and services consumed by an average urban/rural household. They rightly say that the CPI reflects the consumption bundle of households and is thus more pertinent than any other measure of inflation.
Phenomenal surge
Stating that in recent years India has encountered a phenomenal surge in CPI-Industrial Workers (IE) inflation, they argued that CPI-IE should take the centre-stage among the extant measures of inflation as the headline inflation rate.
This is based on the indubitable premise that the CPI-IW also reflects prices of foods as accurately as other measures and covers the price of services that are not included in any other measure of inflation.
Minimal role
The NIPFP study aptly notes that while monetary policy of the RBI has a minimal role in swaying the WPI or the produce price indices (other than through the exchange rate) which largely reflect global prices of tradeables expressed in rupees, the consumer price index has a large share of non-tradeables.
Hence they argue that monetary policy of the RBI has a much bigger role to play in influencing domestic non-tradeable prices.
It is also significant to note that the International Monetary Fund (IMF) has in its latest Article IV Consultation with the Indian authorities made out a case that over time, the RBI could consider giving more weight to the CPI in the conduct of monetary policy.
Its contention is predicated on the logic that as food is a key component of households' consumption and food inflation has a bearing on core inflation, assigning greater weight to the CPI in policy formulation could increase the impact of monetary policy on inflation expectations.
Until August 2010 when concerns over elevated inflation shook the authorities, the WPI which was often trotted out for inflation had 1993-94 as its base period. Only in August 2010, a new WPI was released with 2004-05 as its base period.
It is this change in base year which made the Indian authorities to tell the IMF that the central bank deems that the new WPI index remains the most appropriate inflation measure for policy purpose.
It however hastened to state tacitly that the while in the long-run it might be desirable to express inflation objectives in terms of consumer prices, for the time being the new WPI with wider coverage and updated weights fills the bill to be the most representative measure of inflation nationwide.
New CPI series
Now that a new series of CPI is unveiled, it is still early days till the index gets entrenched and robust enough to be the yardstick for measurement of inflation. Ultimately once this takes place, economists foresee policymakers including the apex bank to depend more on CPI than the redefined WPI with its latest shift in the base year.
Comments
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.