Govt Plans New Mechanism To Compute Inflation

The government is contemplating a new inflation measuring mechanism as the existing system of computing the rate of price rise based on the wholesale price index (WPI) has been found unrealistic.

The new mechanism has become necessary as the existing WPI tends to exaggerate rise or fall in inflation, says Planning Commission member S R Hashim who is heading a government appointed committee working on restructuring WPI.

The new WPI will have two indices, one representing the price movement in commodities and another adjusted index to reflect the inflation, Hashim said.

He said the existing WPI was increasingly being used as an inflation indicator, which was methodologically not very sound as it tended to exaggerate when inflation was rising or falling.

He said the production structure in existing WPI was so structured that prices of some primary commodities would have a cascading effect on inflation.

That is, the effect of an increase in the price of a raw material gets added on to the prices of intermediaries and then again to the final product resulting in an exaggerated higher inflation or vice-versa.

The base year of the WPI is also likely to be changed from the existing 1980-81 to 1989-90 which was relatively a normal year.

Hashim, who took over from Y K Alagh as the head of the working group after the latter became a minister in the United Front government, said recommendations of the group would be presented to the government in six months time.

He said the new adjusted index would be closer to the gross domestic product (GDP) deflator, which is the ratio between current prices and constant prices.

GDP deflator, which gives the real inflation in the economy, is not used commonly as it is available only after a time lag of one to two years.

On the inclusion of service sector in WPI, Hashim said WPI is a commodity index. We are at present dealing with only commodities. If at all it is extended to services, it can be extended only to a very few services.

However, he said the group had some discussions on which all sectors in services could qualify to be included in WPI and added that transport sector could find its way into the restructured WPI.

The group, which consists of about 30 members including academicians, experts and government officials, is in the process of evolving a methodology suited to the data source and quality of data.

Hashim said the group was paying more attention to the methodology this time to keep track of changes in the commodity due to changes in quality and technology over time.

We will have to evolve a whole new methodology to use WPI as an inflation indicator, he said adding that aggregation would be made on the basis of assessment from available data and importance of the product.

Hashim said the second WPI index would serve as a market information on price trends of important commodities and would be more or less on the lines of the existing one.

He said neither the consumer price index (CPI), which is specific to a section of the population, or the GDP deflator would replace WPI as it was the one with the shortest time lag and the most current.

One of the methodologies being worked out for the adjusted index was based on input-output tables and was used in the United Kingdom to calculate inflation.