Base year for inflation to be brought forward

The government is working on revising the base year for the wholesale price index (WPI) to 2000-01 from 1993-94 at present. The change of base, necessary in view of the changing structure of the economy, will lead to a more representative index of wholesale prices in the economy.

The previous base revision in the WPI changed the base from 1981-82 to 1993-94. The exercise was undertaken in 2000. The basket of items was updated and weights of different groups were altered to reflect the changing economic scenario.

This was, however, considered inadequate as new products had become more prominent and with mergers and acquisitions going on in the economy since 1995-96. The brand names available in the early 1990s had already become outdated.

"The components have become outdated and production weights have changed. Reporting is not as strong as it used to be," said DC Joshi, senior economist, Crisil.

The existing index is, however, not as bad as it is being made out to be. The problem with the official figures on inflation is not so much one of measurement, but one of misrepresentation, say economists.

"Given the resources we are working with, we are doing a reasonably good job. However, the problem with data is that it can be misrepresented," said Saumitra Chaudhuri, Economic Advisor, ICRA.

"Much of the data system was designed to feed the planning system. That is why we don't have a state level income, consumption and investment data, neither do we have a system for confidence measures to expectations," says Chaudhuri.

The WPI does a reasonably good job. "It is used as an implicit deflator for GDP in the economy. And compared to actuals, it is very close," said Shrawan Nigam, advisor, Planning Commission.

However, it does leave out a number of important sectors. Services are not represented on it, neither is transportation, electricity, rent and medical expenditure, said BB Bhattacharya, Director, Institute of Economic Growth.

The oft-cited consumer price index (CPI), reporting low inflation levels, is also more likely a mirage. The index has a base of 1982 and the consumption basket of individuals has undergone significant changes in the almost quarter-of-a-century since then.

A number of brands available in the market at that time are not manufactured today. Also, consumption of cereals has gone down and of items like milk has gone up. There is a need to update the base of the CPI to make it more representative of the actual inflation level in the economy.

The Central Statistical Organisation has been talking about conducting a Family Budget Survey to formulate a comprehensive rural and urban CPI for India.

However, lack of funds has held up the project for a number of years.

Given the policy implications of a consumer price index-Dearness Allowance calculations are based on CPI figures-there is a need for a comprehensive measure for overall cost of living for the economy as a whole.