Inflation-mapping a case of six blind men and no elephant – Part 1

Tuesday, 30 December 2008 – 1:14am IST

 

The price rise has slowed down. In Jan, 2008 WPI was about 4%. By August, it was nearly 13%. Now it is close to half of that. Every expert is advising the central bank to cut rates.

The inflation numbers are out. The price rise has slowed down. In January, 2008, inflation as measured by wholesale price index (WPI) was about 4%. By August, it had climbed to a decade high of nearly 13%. Now it is nearly half of that — annual inflation has declined to 6.6% in the week ended December 13 from 6.8% the previous week.
Every expert is advising the central bank to cut rates since inflation has been tackled.
But are we sure of our numbers? Our database and statistics are so weak that any policy formulation based on them is fraught with dangers. It is a sort of “try it out” basis.
Sometime back, the Economic Advisory Council of the Government of India expressed its concerns over inflationary pressures in the economy and was confident that they could be contained and the growth rate maintained. But without malice, one would like to ask the government about the numbers that are of concern to it. More than the rate of inflation, it is the unreliable numbers that are a major embarrassment to the government and should be a matter of concern.
At the national level, there are four consumer price index (CPI) numbers. These are:
1. CPI for industrial workers (IW);
2. CPI for agricultural labourers (AL);
3. CPI for rural labourers (RL); and
4. CPI for urban non-manual employees (UNME).
While the first three are compiled and released by the Labour Bureau in the Ministry of Labour, the last one is released by the Central Statistical Organisation in the Ministry of Statistics and Programme Implementation.
The CPI numbers are considered only partial indices since each caters to specific segments of the population, with different base years. The state level CPI numbers lack uniformity, like with the oldest base year being — believe me — 1939 (for a segment of Bihar). Less than 20 states compile and construct it and a few states have the base year only after 1981-82.
The major concerns and discussions stem from WPI, compiled by the Office of the Economic Advisor (OEA) in the Ministry of Industry on a weekly basis, based on the price quotations collected by the official as well as the non-official agencies. It has a base of 1993-1994, which itself needs to be brought forward. The main issues are pertaining to coverage and not reflecting the travails of common citizens.
For instance, annual inflation (based on WPI) increased to 6.6% in the week ended December 13 compared with 6.8% for the previous week. WPI inflation is reported with a two-week lag and these numbers are for the week ended December 13.
However, inflation for ‘primary articles’, which include food articles, increased by 34 basis points (bps) to 12.15% in the reported week, as compared with 11.81% in the week ended December 6. Thus, primary articles, which have a weight of 22% in WPI, contributed to 42% of the inflation in the week ended December 13, according to a government press release. Annual rate of inflation for ‘food articles’ increased by 27 bps to 10.46% for the week ended December 13. It was 2.33% in the corresponding week a year ago. However, inflation of manufactured products continued to decline because of a continued fall in metal prices and industries passing on excise duty cut announced by the central government in the first week of December.
When I was mentioning it to my students, one pointed out that idli prices have gone up from Rs 5 per two pieces to Rs 10 in the last one year and hence a particular item of his consumption has gone up by 100%. When I checked my past grocery bills, I realised that urad dal has risen to Rs 75 per kilo from Rs 40 in the last year and til oil has reached Rs 180 from Rs 60 per kg. Hence, we can easily see that the gap between wholesale and retail prices is significant and the regional variations are critical (for example, wheat impacts people in the North much more than rice; similar is the case for various pulses and oils).
Also, there are issues pertaining to weights in the WPI basket and that of the poorer segments. For instance, food items have around 22% of weightage in the WPI basket, but we all know that they constitute more than 60% of the consumption basket of a vast majority. Hence, food inflation hurts vulnerable segments and only a blind expert or deaf government can be oblivious of this.
Another issue is regarding the suppressing of price increases by government decisions or by subsidies as in the case of kerosene, LPG, electricity, etc. Underpricing facilitates short-term suppression, but exacerbate the inflationary expectations. In the case of sugar, the government controls it through public distribution service (PDS) prices and the free sale sugar by monthly dispatch orders. Hence, the prices of some items can be temporarily made sticky to minimise the logical price rise due to demand-supply mismatch.
The other major issue pertains to non-inclusion of large portions of the service sector, which constitute nearly 60% of our economy. Doctors’ fees have gone up by more than 100% in the last three years and so has the cost of education and that of many other services and rentals. Unfortunately, adequate representation has not been provided to the burgeoning service activities. The CPI (IW) covers industrial workers in seven sectors, namely factories, mines, plantations, railways, public motor transport undertakings, electricity generation and distribution as well as ports and docks.
Given the significant shift taking place in our employment situation in terms of a large played by the service sector including call centres and IT related fields, it may be appropriate to completely redefine “industry” without adhering to its mid-nineteenth century definition.
 (To be continued)

The writer is professor of finance and control, Indian Institute of Management — Bangalore, and can be reached at vaidya@iimb.ernet.in. Views are personal.

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