Calculation Of Inflation Figure in India

Weekly inflation figure is a big joke.

The rate which was given by the Govt and the actual rates which a man on the street had, had no co-relation. Inflation is currently at below one percent but we are paying over Rs.100 for a kilo of toor dal. And though we all in the media and economists have been screaming themselves hoarse, urging the Govt to relook at the way in which it was looking at inflation, unfortunately, which till two days ago, fell on deaf ears. But finally some noise seems to have reached and the Govt has actually changed the way we calculate inflation. Yet, the sad part is that this new change would in no way once again reflect the true picture.

Amendments made for Calculation of Inflation Figures

Inflation for the week ended October 3, 2009, was 0.92%. And inorder to present a better relfection of the reality, the Cabinet Committee on Economic Affairs approved the proposal to release inflation data on a monthly basis. The base prices for calculation of inflation would be those in 2004 as against the earlier comparison with 1993 prices. The government will now release two sets of inflation data, one is the weekly data which will have primary articles and fuel items and the second one would be more comprehensive on a monthly basis.

Why did this sudden light dawn on the Govt?

Weekly figures were not giving a true picture of the change in prices, especially from the manufacturing sector. But once the Govt goes with a monthly calculation, there would be a much better reflection of the correct picture. One month is a good enough time to take into account price changes over various sectors and that in the real sense, would give a more correct picture of inflation.

The decision to change the base year to 2004 is also a good one as it is considered to be a more stable year, with respect to economic activities like production, trade and their prices. This 2004 base year will ensure more consistency. The monthly data and 2004 as base year is good but what would be a more apt reflection of the true prices would be a change in the weightage of goods on the Wholesale Price Index (WPI). This, the Govt says would also be changed and we will have to wait till November.

India is probably amongst the very few countries in the world which uses the Wholesale Price Index (WPI) to calculate inflation while all the developed countries use the Consumer Price Index (CPI).

WPI METHOD

WPI was used a method of calculation way back in 1902 and we have shrugged off most of the old ways of life, but this continues. In WPI, a total of 435 commodities data on price level is tracked and of this over 100 commodities have no relevance when it comes to giving an indication of price levels. The last time, the WPI was updated to ‘current’ times was in 1993-94. In the computation of WPI, the 3 major variables are Primary articles, fuel, power, light and lubricants and manufactured products. The receipt of input on weekly prices in manufactured products is very low. Services form no part of the WPI at all though its share in the calculation of GDP is over 50%.

Why can’t we shift to CPI like the rest of the world?

CPI tracks the prices of a specified basket of consumer goods and services. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. In India, CPI is calculated on a monthly basis while WPI is on a weekly basis. CPI, as the name suggests indicates price which is a consumer is paying while WPI is about the wholesale prices and there is always a huge variance between the two. So how can wholesale prices be an indication of what the layman on the road is paying?

Conclusion –

we will get a new set of inflation rate but once again it may not be a 100% reflection of the picture on the ground.