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| Which Price Index? |
| Business Standard / New Delhi Aug 17, 2009, 00:35 IST |
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New inflation indices need to be more representative
An accurate gauge for measuring a problem is the first requirement for finding a solution. A doctor who cannot read a patient’s pulse or temperature is unlikely to know what the problem is, and what to do about it. Ditto for the economy; monetary policy is likely to be off the mark if the measures for inflation, like the wholesale price index, are faulty and misleading. In recent weeks, the index has been reporting an absolute decline in prices. But the truth is that the index has become so out of date as to be practically useless; out of date because it measures (and gives weight to) the prices of products that have become less important to the economy, and ignores in relative terms those that have done the opposite. For instance, the index does not have Crocin in it — it does have Saridon, but how many people use that these days? Few of the leading pharmaceuticals firms figure in its list (eg Ranbaxy and Dr Reddy’s), but there is a Dey’s Medical Store in Kolkata. Some of the inclusions are puzzling — there’s Him butter made in Himachal, and Campa Cola in Delhi (there’s no Coca-Cola but there’s Fanta), there’s Scissors cigarettes from ITC, ECIL TVs, Wipro printers and computers and Hindustan Nova cars from Hindustan Motors (the saving grace is that the data for 800 cc cars are taken from the automobile association). The LPG price is not measured in Kolkata though the price of petrol is.
These examples relate to products and weights decided on for the base year of the index, ie 1994-95 (and introduced in the year 2000). But even 15 years ago, the choice of brands for cars, shaving blades, TV sets, soft drinks and the like was obviously defective. That was also a time when there were more pagers than mobile phones, more scooters sold than motor-cycles, and when laptop computers were a rarity. The economy has changed, but the structure of the wholesale price index has remained unchanged. But if the wholesale price index has a base year that goes back 14 years, the consumer price index for agricultural workers goes back even further, to 1986-87. In an economy that has quadrupled since then, it does not need emphasising that we need more up-to-date measurements.
All this is obvious, and the point hardly needs to be laboured; indeed, the issue should have been addressed long ago. Still, it is better now than never, and the launch in a few months of the new wholesale and consumer price indices is eagerly awaited; the wholesale index will have more than double the number of items covered today, and there will be a national consumer price index (in place of today’s separate ones for agricultural workers, industrial labour and urban, non-manual workers). The new CPI will have four segments — a national index, and one each for urban and rural India, and one for each state. Better all-round measurement will lead to better short-term economic management.
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