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How India calculates inflation (some important news for all viewer)

Rising inflation was the most recent ticklish political issue that hit the Manmohan Singh government. But was inflation rising because of price rise in essential commodities? Or was it because of the 'erroneous method' of calculating inflation?

Some economists assert that India's method of calculating inflation is wrong as there are serious flaws in the methodologies used by the government.

Economists V Shunmugam and D G Prasad working with India's largest commodity bourse -- the Multi Commodity Exchange -- have come out with a research paper arguing that the government urgently needs to shift the method of calculating inflation.


Saying that there are serious flaws in the present method of calculating inflation, the paper India should adopt methodologies in developed economies.

So 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.

Economists Shunmugam and Prasad say it is high time that India abandoned WPI and adopted CPI to calculate inflation.

India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for.

"CPI is the official barometer of inflation in many countries such as the United States, the United Kingdom, Japan, France, Canada, Singapore and China. The governments there review the commodity basket of CPI every 4-5 years to factor in changes in consumption pattern," says their research paper.

It pointed out that WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level.

The paper says the main problem with WPI calculation is that more than 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.

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.

Shunmugam says WPI is supposed to measure impact of prices on business. "But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index. And it does not factor in services which have assumed so much importance in the economy," he pointed out.

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.

The WPI is published on a weekly basis and the CPI, on a monthly basis.

And in India, inflation is calculated on a weekly basis.

SOME iMP neWs

Financial Data
 GDP to grow 9.2%, touch Rs 28,44,000 crore in 2006-07
 Inflation at 6.7% on February 3 a matter of concern
 Govt's top priority: Growth without high inflation
 Risks: volatile oil prices, delays in WTO talks
 Risks: Global macroeconomic imbalances
 Priorities: Making growth inclusive
 Priorities: Fiscal prudence, high investment
 Priorities: Improving govt intervention in critical Areas such as education and health
 Priorities: Subsidies to be targeted
 Agriculture to grow 2.7%, share in GDP dips to 18.5%
 Industry to grow at 10%, share in GDP up to 26.4%
 Services to grow at 11.2%, share in GDP rises to 55.1%
 10th plan average GDP growth at 7.6% vs targeted 8%
 Average inflation in 52 weeks ending Feb 3 at 5%
 Food items, wheat, pulses, sugar driving inflation
 In industry, mining, gas and power issues of concern
 Current account deficit at $11.7 billion in H-1 of FY07
 Exports up 36.3% to $89.5 bn in April-Dec 2006-07
 Capital flows strong, FDI up 98.4% in Apr-Sept 2006-07
 FIIs sellers in H-1, but likely to be positive in H-2
 Core sector growth 8.3% vs 5.5% in Apr-Dec 2006-07
 Infrastructure to require $320 bn in 11th plan
 Public sector to fund 60 per cent of infrastructure
 Fiscal deficit budgeted at 2.8 pc in 2006-07
 Tax-GDP ratio rises to 11.2% FY07 vs 10.3% in FY06
 Personal income tax mop up rose 30.3% in Apr-Dec FY07
 Share of direct taxes in total revenues grows to 47.6%

you get so caught up in some earthly sense of bliss you're fading from beautiful existence

you get so caught up in some earthly sense of bliss you're fading from beautiful existence

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