Reserve Bank of India (RBI) Governor D Subbarao on Tuesday said the country should move towards developing and using a producer price index (PPI) to gauge inflation more accurately.
The current inflation indicator, the wholesale price index (WPI), does not capture the price movement of services and is a hybrid of consumer and producer price quotes, he added.
Subbarao said sellers’ and purchasers’ prices differ due to government subsidies, sales and excise taxes and distribution costs.
“For these reasons, it is desirable that we move towards developing a PPI that measures the average change over time in the sale of prices of domestic goods and services,” said Subbarao, while addressing the Statistics Day Conference.
He said the divergence between WPI and the consumer price index (CPI), due to coverage and weights, is one of the problems the central bank faces in assessing inflation trends.
While WPI has shown easing trends recently, the CPI has been moving upwards. In May, the rise in WPI over the year was 7.25 per cent, while the new composite CPI was at 10.36 per cent.
The central bank governor said core inflation had better predictive power if taken for a longer series of over three years, though its measurement and interpretation was still a challenge for RBI. Core inflation had stabilised at around five per cent in recent months.
The central bank monitors all measures for inflation before taking policy decisions, he said.
In recent times, RBI had faced criticism for changing the goal posts regarding inflation for its policy actions. For example, when RBI cut interest rate by 50 basis points (bps) in the April policy review, it had pointed to stable core inflation for its action. However, in June, during the mid-quarter monetary policy review, it kept rates unchanged, against the expectation of a 25 bps cut, and cited higher headline and core inflation for its action. RBI had also reasoned that easing in wholesale prices had not trickled down to retail consumers.
Data for NBFCs, co-op banks
Subbarao also said the central bank’s coverage on non-banking finance companies (NBFCs) and cooperative banks was inadequate. “For the Reserve Bank to have a better understanding of the influence of NBFCs on liquidity and the credit creation process, we need more comprehensive and higher frequency data,” he said. For better coverage on cooperative banks, RBI needs to improve the data reporting system in coordination with the National Bank for Agriculture and Rural Development, he said.
On potential growth
India’s potential growth rate, consistent with low and stable inflation, may have fallen to 7.5 per cent from the post-crisis level of eight per cent, Subbarao said.
“In its annual report for 2009-10, the Reserve Bank had reported that the potential output of the Indian economy may have dropped from 8.5 per cent pre-crisis to 8 per cent post-crisis. Latest assessment following the standard filtering technique suggests that potential output growth may have further fallen to around 7.5 per cent,” Subbarao said.
Potential growth rate is the rate at which an economy can grow in the medium-term without stoking inflation.RBI has projected the Indian economy to grow 7.3% in the current financial year started April compared with 6.5 per cent in 2011-12.
He said assessing India’s potential growth rate remains a challenge, as the estimate could be vulnerable to errors because of the huge revision in gross domestic product data, uncertainty about level of productivity growth and lack of widely agreed methodology.
“These reasons get accentuated in the case of India because of lack of comprehensive and consistent data on employment,” he said.
