Measuring inflation

More needs to be done besides changing WPI base

Economies undergo structural changes over time. The pace of change would naturally be higher in a developing economy like India. Thus, to be able to make policy interventions in time, it is important for policymakers to understand the nature and pace of change. It is with this objective that government departments responsible for collecting data keep refining and improving the way they measure economic activity and prices over time. In this context, as reported by this newspaper last week, the government is in the process of changing the base year for the wholesale price index (WPI) to 2017-18. The current base year for the series is 2011-12. The proposed change should be welcomed because it will improve the understanding of price changes at the wholesale level.

Aside from the base year change, the government also intends to increase the scale and scope of data collection. The coverage of commodities in the index is expected to go up by 50 per cent with a significant expansion in the manufacturing group. The number of reporting establishments for each commodity in the index is also likely to increase significantly. The reported changes would improve the quality of the index. Since the index is also used in deflating nominal gross domestic product to real, it would help in measuring real growth more accurately. However, it’s not clear why the government has not selected a more recent year for the base change. Besides, at a broader level, more needs to be done to accurately measure the change in prices at different levels.
 

The WPI serves a limited purpose. It has been argued that India should move to a more representative producer price index (PPI), which will help businesses gauge price changes more accurately. The PPI measures change in the prices of goods and services as they enter or exit the place of production. The WPI, on the other hand, measures prices at the bulk transaction level. This may also include taxes and transportation costs, while the PPI tracks the price received by the producer. Different PPIs can be constructed such as for output and input. Also, the WPI does not include services, which account for the bulk of the output in India and can be captured by the PPI. Thus, in order to gauge price changes at the production stage, it makes sense to move to the PPI. A large number of countries have shifted from the WPI to the PPI over the decades. It would be advisable that the government of India also initiate such a move.

In this context, it is worth mentioning that the revision in the consumer price index (CPI) is also due. It was postponed because of the government’s reservations over the findings of the consumer expenditure survey of 2017-18. The next round of the survey was affected by the pandemic. Now that the country is largely open, the government would do well to complete the process at the earliest. It has been argued that the current CPI doesn’t reflect the actual consumption basket. Since the inflation rate based on the CPI is the nominal anchor for monetary policy, it is important that the index reflects the actual state of consumer prices. In general, it is good that the government is changing the WPI base year, but a lot more needs to be done to properly gauge inflation at different levels.