New price index gathers dust

WITH ITS BACK PUSHED TO THE WALL BY INFLATION, GOVT PULLS OUT ALL THE STOPS

Even as the government grapples with a surge in prices, a three-year old initiative to recast the index that measures wholesale prices is not getting anywhere fast.

The revised index is likely to take at least another year to implement and may spill over into the tenure of the next government.

The current Wholesale Price Index (WPI) measures headline inflation. Economists and policy makers alike have for long said it is not a completely accurate measure of the price rise that consumers face at the retail level.

A revised WPI is expected to address these concerns, but there are also fears about what else it would do. Some say the government may hold back the new index as a higher inflation level would prove to be a political hot potato, revealing more than it ought to.

In 2005, the government set up a group headed by economist Abhijit Sen, who is now a member of the Planning Commission, to update the WPI base year of 1993-94. The committee's tenure ended on March 31.

The report is expected any day and will recommend revising the base year to 2004-05 as well as doubling the number of the commodities and articles whose prices are captured on a weekly basis. They now total 435.

The changeover is expected to reflect new output and price patterns. For instance, the weight of the fuel group in the index is expected to go up from the present 14.23 per cent. Given that fuel prices have increased in recent times, a higher weight could well show higher inflation.

"The report is expected any day. However, it will take a full year during which comparable data will be collected and the time series tested so that data continuity is not impacted," said Pronab Sen, chief statistician of India.

Asked whether a revised WPI would have helped the government tackle the current inflationary surge better, he said: "I do not think the trend would have been any different."

Economists expect the new WPI to capture price movements more accurately. "A revised index could have provided more accurate information. But the basic sense of dimension that prices are rising would not have changed," said Saumitra Chaudhuri, member, Prime Minister's Economic Advisory Council.

DK Joshi, principal economist, Crisil added that the current index does not reflect correct ground reality. "A revised price index will hopefully improve the decision making process because it would rely on more accurate data," he said.

It is not just the new WPI that is taking time. The government has been working towards two new consumer price indices for rural and urban India (CPI-R and CPI-U). Officials have said the CPI-U which would replace the CPI-UNME by mid-2008.

However, Pronab Sen declined to say when the new index would be ready. "Time series for these indices are being prepared and we are currently providing training to collect data for these," Sen said.

Sen added an index revision is a time consuming process. "It takes a minimum two years to revise the WPI", he said.

V Shunmugam, chief economist, Multi Commodity Exchange, says it is time that India had a robust consumer price index. "Only a few countries use WPI to measure inflation. This will truly reveal the impact of inflation on individual consumers," he added.