Price of neglect

Inflation — almost 6.58 per cent according to the latest data — is on the rise. So is the debate on inflation. Both however suffer from a defect — imperfect information. To begin with, in popular perception, a distinction is not drawn between price level and inflation rate, the latter being the rate at which prices increase. More important, the overall measure of inflation requires a commodity-wise index, leading to four problems. First, the choice of commodities; second, the relative importance accorded to them; third, the method of aggregation; and fourth, quality of price data.

As the report of the Statistical Commission argued in August 2001, we have problems on all four, particularly the first, second and fourth. Consequently, the two main versions of price index (wholesale price index or WPI and the four variants of consumer price index or CPI) are out of date, and the government resorts to expressions like core inflation and headline inflation without being specific about what these mean. This is over and above the time-lag problem, which is why policy decisions are based on the point-to-point WPI, an imperfect indicator at best. As the Indian economy has evolved, baskets and weights currently used are no longer appropriate.

Relative under-representation of IT and services and relative over-representation of edible oils are cases in point. There is also mismatch, and an increasing one, between WPI-based and CPI-based inflation, although given their different objectives, the two series shouldn't be expected to show identical results. There has been talk of constructing a producer price index (PPI) that will update base years and have more representative baskets and weights. But unlike the alacrity with which the GDP series was revised, this hasn't made much headway. As for the problem of quality of price data, surely outsourcing is possible. India prides itself, among developing countries, on the quality of its statistical information, despite Statistical Commission's indictment. However, price information is an area where this pride is misplaced. In the absence of reliable inflation data, quality of policy response also becomes a function of garbage in, garbage out. Just as India was goaded by the IMF into publishing quarterly GDP data, perhaps the industry ministry needs an external trigger to start revisiting inflation estimation. Till that happens, India is stuck with the imperfect and inappropriate point-to-point WPI.

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