WPI inflation lacks welfare aspect: Gokarn

Says Consumer Price Index has some promise as a replacement or a successor to WPI but it is still in the evaluation process

The Reserve Bank of India (RBI) today said the wholesale price-based inflation lacks the characteristics to measure welfare aspect of consumers.

The central bank takes the WPI-based inflation into account for policy formulation though it has also talked about consumer price based inflation in recent times while announcing monetary policy measures. The government has started announcing CPI-based inflation since February this year, which comes with one month lag.

“The reason why we worry about inflation is because it is welfare issue. WPI does not directly measure what people are paying for their daily necessities. WPI is not directly related to welfare,” Subir Gokarn, deputy governor of RBI, who looks after monetary policy department, said today.

 

WPI inflation has been stubbornly high for the last three years, which has prompted the central bank to hike interest rates 13 times between March 2010 and October 2011. Though RBI reduced the key policy rate in April -- by 50 bps to 8% -- it maintained status quo in the next four policy reviews. RBI is expected to hold rate once again when it will announce its next policy review on 18 December as inflation continues to stay above the central bank's medium term comfort zone of 5%.

The data on Wholesale Price Index (WPI) inflation for November is expected on Friday.

Gokarn also said RBI wants to get inflation under control because it is in the long-term interest of the economy in terms of supporting higher growth over a long period of time.

According to Gokarn, the WPI emerges as a kind of a quick and somewhat limited indicator and it has maintained that status because nothing has come along to displace it.

“We have a recent attempt to do that through the Consumer Price Index (CPI) which aggregated all India CPI. That has some promise as a replacement or a successor to WPI. But it is still new and just a year old. We need to understand its properties and dynamics. But we look at it as a potential successor and at this point of time it is in the evaluation process,” said Gokarn.

According to Gokarn the drivers of food inflation currently are milk, protein products, meat, eggs, pulses to an extent and vegetables.

“People are diversifying their diets and putting demand pressure on these products. But the prices of these products are rising and this means the production system has not shown the capacity to respond to these demands,” said Gokarn.

Gokarn also said that international commodity prices are also a source of concern when we look at our high growth phase.

“The global demand has been quite sluggish due to which it could have expected that commodity prices particularly oil would have softened, but that has not been the case. We have to think in terms of managing demand. There are bottlenecks in terms of infrastructure and other parts of the supply chain which are the cause of problem,” said Gokarn.

Gokarn believes that mainstream paradigm of monetary policy is that it is very important for people consumers, investors and various stakeholders to have some confidence in the system's commitment to a lower inflation regime. According to Gokarn, overall there are a number of risks on the inflation front in terms of what is being done about them.

There is also a need to reduce fiscal deficits to bring interest rates, said Gokarn.

According to him there is a need for reorientation of public spending from consumer oriented expenditures to investment oriented expenditures.

“Public investments strategically done helps towards multiple benefits in terms of businesses, individuals and households,” said Gokarn.