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 :)
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 :)
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