Thursday, March 27, 2008

Two INs

The Two INs stand for INflation in INdia

The article was an attempt to answer 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 Indian government has taken WPI as an indicator of the rate of inflation 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.

Some economists say that CPI is a better measure than WPI. It may be because 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view.

Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation. Similarly many commodities which are hardly used by the consumer seem to have their mark on the inflation. Most importantly services, which constitute a large chunk of the prices paid by the consumer are not included in WPI.

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 can not be the barometer to calculate inflation.

But why is India not switching over to the CPI method of calculating inflation?

Finance ministry officials point out that there are many intricate problems from shifting from WPI to CPI model.

First of all, they say, 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. In fact, as of May 21, the latest CPI number reported is for March 2006.

While ending this note, for a change let me try to end it in a positive tone.

One of the most important observation is that while calculating inflation, government doesn't take into consideration the effect of petrol prices. It was there in the previous set of commodities, but no longer is that included in the inflation for the past 1.5 decade. And this is the era when the petrol prices have been zooming high.

If that's the case, then our real GDP growth would have been quite higher considering the increase in fuel prices, which already factor in our increasing prices, but are not factored into the official inflation figures.

So, India may have already clocked close to 15% growth rates :)

Sunday, March 23, 2008

Miscellaneous-the first of many more

Three months, exactly after which I came back to my homeplace...Big deal again:)..
It doesn't get nostalgic for me, but still the feeling back of coming back to home makes you feel happy.
On my way back iam presently going through this region called as Telangana the dry area of my state. It has many fields, but the interesting part is many of the fields are cotton fields.

Iam within 100 kms from Hyderabad, the capital city of my state and one of the most happening cities in India, but the villages still donot seem to have any effect of the development happening around the cities.

it is close to 6:30 am now and even the dry parts of the region look pleasant and liveable. 2-3 more hours will bring the scorching sun to its peak and the pleasant environment will turn into a very hot, dry place with no water and power. The farmers are supplied power during the wee hours of morning and for couple of hours in the evening.

I guess those few hours are enough for those farmers, nevertheless it would mean that during the other hours they have to work on non agricultural activities to get their stomach full. What will happen to all these farmers if these cash crops fail or worse, what will happen if the prices of cotton crash down that the farmer can barely get back his returns. yesterday, I was reading an article in which it is mentioned that the following crops give these returns for every rupee expended:
Rice - 0.47
Wheat - 0.5
Cotton - 0.7
SUgarcane - 0.87

With these being the returns, the poor farmer would be inclined towards the cash crops at any given day. But, cotton and sugarcane are not going to suffice the hunger of the population. Hence money has to be poured into agriculture every time, and subsidies have to be continued.

India which is an agriculture based country, still has meagre food exports, whereas USA has clocked agricultural exports of worth $103 billion in FY 2007 close to 4 fold growth in the past 4 years alone. I guess with the developing countries cutting down their import duties, and the western ones continuing their huge subsidies for farmers, one can expect more exports from these countries and therby crushing the back bond of many developing ones.

THe article itself may sound to have had no specific basis, but it is the flow of thoughts during my travel back home, which I did not want to miss and hence the article:)

My more witness of war crime

On 16th march 1967, during the vietnamese war American soldiers demolished one of the villages in vietname "My lai".
My lai massacre has been one of the most gruesome incidents of the Vietnamese era.
Hundreds of villagers including women and children were brutally raped/murdered.
Before the attack on the village the instructions to the American troops was that any moving being to be considered as enemy and to be shot dead without any discrimination.
The justification given by the commander in charge of the troops was that he was following the orders from the top and that he wasn't guilty of the murders committed.

The incident itself came to light a year later because of the bold inspection by one of the American soldier himself who heard it across from the mouth of one of the other soldiers who boasted about the incident.

16th March earmarked the 40th anniversary of the massacre. The survivors still remember every moment that happened. One of them could survive because she was under the debris of dead bodies.

This is one more evidence of what war can do...and that the same is being witnessed in Iraq and Afghanistan.

Who will bear the social costs of the trauma that the people go through? In what way is war justified?

A recent study came up with the result that at 1/6th of the cost of Iraq war, US could have revamped its social security system and get rid of all the flaws in it.

Similar situation is about to happen in our immediate neighbourhood, Tibet. For whatever be the reasons, the amount of trauma that the people in both the countries have to go through is tremendous and in no way a justification for the costs incurred on the war. Restriction of access to tourists and media proves the point that there is an unprecedented use of force and violation of human rights to make sure that the ego of one nation is satisfied.

Probably the same can be said about India's denial for UN resolution on the issue of Kashmir. The other states in India feel that Kashmir is their right and that kashmiri's also believe the same. Of course I as an Indian want my Kashmir's brethren to remain with me, but it is my preference which I cannot enforce upon. My arms are open for them any given day and my forces are present to ensure its safety if asked upon. But they have a right to say their point and if UN resolution gives them a chance to entertain that option, let them use it.

Let us not be insecure of ourselves. If not as an outsider, let us at least act in the sane manner of making people believe in their rights.

Wednesday, March 12, 2008

China..reason for inflation in US :)

Looks like the new year has proven to be a nightmare to the rulers of china.
It all began with the severe snow, the worst in half a century which literally brought the whole country to a standstill...More than 3 million passengers were stranded in a railway station...

After the storm settled down, another storm has hit the ruling party....

the storm of inflation...It rose to close to 8.7% the highest in the past 12 years.

All these in the year of the olympics where China wants to showcase its prowess in all aspects.

The country which was defying all the laws with its continued double digit growth rate for more than a decade seems to be faltering on the front of ensuring the survival of many of its citizens who are starving to death due to the roaring prices.

No longer is one country's inflation its own problem. When it comes to the likees of the exports that China does it becomes a global problem, because the chinese products would no longer remain cheap causing the ripples across the globe.

It would be interesting to see how Federal bank of America tackles this situation. It is pumping huge amounts of money into the markets, of the order of $200 billion to ease the liquidity crunch and reducing the inflation rate to boost the consumption. The interest rates in US are already at very low rates and Fed is still reducing them

If at all Fed would have wanted to something not to happen, then it was the increase in prices of Chinese goods, but the nightmare has become reality.

All the factors which should act as stabilizers seem to be adding more chaos to the existing situations.

Last term we studied that it is vey difficult for US to get into recession because every week US monitors close to 25 variables to understand the economic situation and accordingly action plan is framed. But, nowadays nothing seems to work the US way on the economic front.

Interest rate alone is one of the very few factors which the federal banks of any country can control. With the spiralling costs Fed would be tempted to increase the rates but to boost the economy it has to cut the interest rates.

I pity the chairman of FED who is caught in this nightmare. I hope US comes out of this recession so that all the students pursuing managemenet studies are not affected :)