Inflation in India- Is govt has acumen of it

Rising inflation is the most ticklish issue that has hit the common men in India. Many of us read about inflation and inflation rate in newspapers. It says that government has tamed the inflation rate to 2-3% and sometimes it goes negative. But most of us remain enigmatic, if this soaring tiger is tamed by the government then how price of food articles is doubling yoy. But those who had not pondered for the same should give it a thought. Is government cheating on us or the method of calculating inflation is wrong as there may be serious flaws in the methodologies used by the government. The former assumption cannot hold true as it is not possible to cheat the country where people like Amratya Sen (Nobel prize winner in Economics) has thrived.

Saying that there are serious flaws in the present method of calculating inflation, I will take you through the methods adopted by the Indian government to calculate inflation rate, what flaws in it are and what steps government can take to make this parameter clear to some extent

So how does India calculate inflation? And how is it calculated in developed countries?

•India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
•Most developed countries use the Consumer Price Index (CPI) to calculate inflation.

Wholesale Price Index (WPI)

WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks.

The major flaws in WPI are:-

•WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level.

•The main problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view.

•India constituted the last WPI series of commodities in 1993-94; but has not updated it till now that economists argue the Index has lost relevance and cannot be the barometer to calculate inflation.

•WPI is supposed to measure impact of prices on business. But India uses it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index. And it does not factor in services which have assumed so much importance in the economy.

Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

Reasons Why India should switch to CPI:-

•CPI actually measures the increase in price that a consumer will ultimately have to pay for.

•Also CPI is something which is adopted by most of the developed countries around the world like United States, United Kingdom. Government of these countries review the commodity basket of CPI every 4-5 years to factor in changes in consumption pattern.

Why India is not adopting this parameter of calculating inflation is something intriguing for us.

Firstly, government says, in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual Employees; CPI Agricultural labourers; and CPI Rural labour.

Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers.

May be government is scrupulous is their reasons, but some measures should be adopted to put the right parameter to calculate inflation. Government is discussing to revise the number of commodities to 980 and base year to 2004-05.If it is adopted soon then may be till you read this article you will be getting the real inflation rate.

Till that time just give a thought process to your mind and think about the other factors which can lead to a transparency in inflation calculation process.