When the Reserve Bank of India (RBI) unveils its monetary policy review and the finance minister tables the Union Budget 2012-13 in Parliament next month, they would have one more set of inflation numbers to base their policies on. For the first time, India would come out with consumer price index (CPI)-based inflation data from February 21.
The index has been out from last February, but inflation figures are yet to come out because there is no base month to calculate these.
So, the question is which inflation number will policy makers rely on to frame policies?
It’s almost certain for the next policy review or the 2012-13 Budget, the CPI-based inflation rate may not be given much value, as there is no series. Economists believe it’ll take some more time, at least a few years, to stabilise.
An official from the ministry of statistics and programme implementation said a time series on CPI inflation could be available only after a few years. But in the long run, it could be a barometer for RBI and the government on the way prices at consumer levels move.
“If we have CPI, the basket will be more skewed towards food, which will give a correct picture for the RBI’s monetary policy decisions,” HDFC economist Jyotinder Kaur told Business Standard. She said the emphasis was more on food in developing countries, while the basket was more balanced for developed countries.
However, CARE Ratings’ chief economist, Madan Sabnavis, said the RBI needed to look at the wholesale price index (WPI) numbers, as these could control what happened to production.
World over, either a producer price index (PPI) or a CPI-based inflation rate is taken as an indicator of the movement of prices in the economy.
India does not have PPI, the movement of prices at the time of production and which also includes services. In that sense, PPI is a better tool. But there is a problem of double counting of various items as finished products and input prices.
In this respect, a CPI may have an edge, as it includes some services taken in the miscellaneous category. These services include education, medical care, recreation and amusement, transport and communication, personal care and effects, and household requisites.
But economists suggest both WPI and CPI be taken into consideration while formulating policies. “I would suggest a representative basket or changing weights of CPI or looking at average between WPI and CPI,” Kaur said. Sabnavis, however, said CPI included services, which the RBI could not target. “By increasing or lowering interest rates, the RBI can control credit, and credit is not taken for services,” he added.
Also, unlike the WPI, based on centralised collection, there are 1,181 villages and 310 towns as collection centres for CPI. As such, items within the larger category of weighted items would vary from region to region, depending on consumption patterns, which would give a better idea of price movements.
Sabnavis said CPI made more sense from consumers’ point of view. But, again, with India having a lot of disparity, the model would not work here, as consumption patterns of people in different regions differ a lot. In fact, the consumption patterns in Mumbai and Pune also differ a lot.
| COMPOSITION OF THE INDICATORS | |||||
| Title | CPI-IW | CPI-AL | CPI-RL | WPI | CPI* |
| Base | 2001 | 1986-87 | 1986-87 | 2004-05 | 2010 |
| Lag** | 1 month | 18 Days | 18 Days | 14 Days | 18 Days |
| Elementary Items | 320 | 260 | 260 | 676 | 200 weighted items# |
| Weight of food products (%) | 48.47 | 69.15 | 66.77 | 24.3 | 49.71 |
| Weight of energy products (%) | 7.43 | 8.35 | 7.9 | 14.91 | 9.49 |
| Weight of miscellaneous items, which primarily include services (%) | 23.26 | 11.73 | 11.87 | Services not included | 26.31 |
| No. of data collection centres | 78 Urban | 600 rural | 600 rural | centralised collection | 1181 villages and 310 towns |
| Note: Weights do not include all categories IW: Industrial workers; AL: Agricultural labourers; RL: Rural labourers *The new CPI comprises Consumer Price Index for urban areas, rural areas and a combination of both; **Days since the end of the reference month; #Weighted items have various varieties within each item depending on usage in a particular state. Source: Ministry of Statistics and Programme Implementation, Ministry of Commerce and Industry, Labour Ministry | |||||
Currently, the apex bank bases its monetary decisions on WPI inflation as well, as other CPI indices. The problem is the current CPI inflation numbers are segmented figures, as these measure price movements of items consumed by agricultural labourers, rural labourers and industrial workers.
As such, when it comes to projecting inflation numbers, RBI generally gives an idea about WPI inflation numbers by the end of a financial year.
Segmented consumer price indices also serve specific purposes. The one for industrial workers, which is used for calculating dearness allowance of organised sector workers, while the agricultural labourer index helps determine model agricultural wages and also those for the Mahatma Gandhi National Rural Employment Guarantee Programme.
