Opinion Is the CPI the new IIP?

Just days before,we were informed that the WPI inflation was below the 7 per cent target of the RBI,and that core inflation had collapsed to below 5 per cent. Among inflation indicators,the GDP deflator is most preferable because it is a comprehensive measure. However,it is only available with a two-month lag,and only available on a quarterly basis. The WPI is not to be preferred because it excludes services. The CPI excludes investment goods,but generally gives estimates close to overall inflation as measured by the deflator.

The new CPI says double digit inflation,and that means no more rate cuts,and perhaps even rate rises. But that would be a hasty,and possibly wrong,conclusion. Investors,we may have yet another data problem. Over the last year,inconsistencies have turned up with several data series,for example,industrial production,exports. Now add the new CPI to the list. Why? Because it is showing inflation levels to be higher than 2-3 percentage points than the “actual” CPI inflation. A tall conclusion,perhaps,but you be the judge. But first look at the data presented in the table.

Eleven indicators of inflation are presented for three time periods — April-December 2010,April-December 2011 and the first two months of 2012. The periods are chosen according to the latest availability of comparable data. In 2010,no data for the new CPI have been made publicly available (see discussion below). There are two major conclusions that follow from even a casual perusal of the data. First,that all comprehensive indicators of inflation (excluding the last three WPI sub-groups) are broadly comparable with each other and with the inflation indicated by the GDP deflator. Note that the difference in average inflation and the GDP deflator was 1 percentage point in 2010 and only 0.3 percentage points in 2011.

Second,the new CPI index shows an annual inflation rate about 3.2 percentage points higher than an average of all inflation indices. It is true that the new CPI index is more comprehensive,is better designed,has more products,etc. But were the old CPI indices so much off the mark? Have we been living in a lower-than-actual CPI inflation darkness for so long? Is there something seriously wrong with the new CPI? Or is every other indicator of inflation in India seriously out of whack?

There is an additional story behind the new CPI index. Data for the new series were released starting January 2011,but its use by analysts and policymakers only started a year later. Why? Because,inexplicably,the CPI makers have not released the pattern of inflation in 2010. The series has a 2010-equal-to-100 base,but the inflation figures reported for each month in 2011 was not year-on-year inflation but an entirely new animal,month-over-previous year’s average. This is another attribute of incomparable India,because,to my knowledge,no one,but no one,creates an index like the ministry of statistics and programme implementation (MOSPI). What everybody except MOSPI does (and there are more than 150 government statistical agencies in the world) is choose a base year,make the average equal to 100 and report the individual month indices for the base year. If MOSPI has information on the average for 2010,it obviously has information for each individual month. But,for reasons both bizarre and unknown,MOSPI has not provided this information to anyone outside of the hallowed halls of the agency. Perhaps MOSPI is acting as if it this were the 1960s,a delusion for which it has considerable company in the government. In those days,pronouncements about the economy did not really matter. Today,such information about the health of the economy is eagerly awaited by the PM,RBI and investors around the world. If,as several commentators are headlining,that India has double digit inflation,and that this is due to bad data and/or index,that is worrisome,extremely worrisome.

What does all this mean for and about inflation and monetary policy in India? Inflation has hovered around a 6 per cent rate in 2012. This is at least 3 percentage points below the average of last year. This is very good news and leaves considerable room for further rate cuts by the RBI,all other things being equal. But all other things are not equal. One is the international price of oil,which should decline and generally favour lower inflation and more rate cuts. What will upset the delicate decline in inflation rates in India is the rumoured 15-20 per cent increase in the minimum support price for crops. If that happens,then all bets on declining inflation are off. If that happens,then the socialist God is first making the government mad,before it destroys itself,but hopefully before the economy is destroyed further.

The writer is Chairman of Oxus Investments,an emerging market advisory firm