Inflation: perception and reality

By M H Ahssan

There is an urgent need for reliable and transparent consumer price indices that covers the large majority of Indian families, from the poorest upwards.

The commercial media has been treating the release of the Wholesale Price Index (WPI) numbers every Thursday as a special event for some time now. In recent weeks, the numbers have been interpreted as a signal that inflation - the general rise in the price of goods and services - has been moderating, and has even been halted.

Business and industry find this interpretation useful to further a specific agenda. It has become a weekly ritual for their representatives to follow the unveiling of the latest WPI numbers with a call to government for further steps to make credit available to industry on easier terms. The perception of the common man has however been quite the opposite - rising prices are still a major preoccupation and worry. So how does one understand this apparent contradiction?

The Wholesale Price Index
The WPI, published weekly by the Ministry of Commerce and Industry, tracks the wholesale traded price of 435 items that include agricultural commodities (such as rice, tea, raw cotton, groundnut oil seed), industrial commodities (such as iron ore, bauxite, coking coal), intermediate products for industry (such as cotton yarn, polyester fiber, synthetic resins, iron & steel, sheet glass), products for consumers (atta, sugar, paper, electricity, ceiling fans) and energy items (petrol, kerosene, electricity for commercial use). The weight attached to each item in the index is meant to reflect the volume (by value) of wholesale trade in that item in the Indian market.

The effect of rising prices on the family budget - consumer price inflation - is however universally determined by relating a typical consumer to a 'basket' of goods and services that s/he buys and tracking the price of this basket. The WPI 'basket' is clearly far removed from any consumers 'basket' and meant only as an indicator of a change in the general level of prices in the economy.

But even as a general indicator of prices, the WPI data is far from accurate, according to a Government appointed committee that examined the WPI and submitted its report in May 2008. The items that are considered for the WPI and their respective weights were fixed back in 1999-2000 and have not been revised since then though there have been major changes in the economy over the last decade. Services such as rail and road transport, health care, postal, banking and insurance, for example, are not part of the WPI basket. Neither are the products of the unorganised sector that are estimated to constitute about 35 per cent of the total manufactured output of the country. The index thus falls well short of being a broad based indicator of the price level even in its construction.

The practices surrounding the gathering of data and generation of the index are even more disconcerting. The wholesale transactions that are to be used to determine the prices that go into the index are not precisely specified. Two-thirds of the price quotations are sourced from only four metros. Price reporting by manufacturers is voluntary and often not forthcoming. Scrutiny of data by the collection agency is lax.

These are only some of the shortcomings recorded by the committee. A random inspection of the index for the item labeled 'antibiotics' for example, throws up the following absurdity - prices are stated to be lower now compared to January 2005 and only 13 per cent higher than in 1994! The quality of the index is indeed suspect. The commercial media, however, has been content to lap up the WPI data, week after week, never raising inconvenient questions on the appropriateness of decision making based on such data.

Measuring the 'cost of living'
If the WPI is not an indicator of consumer price inflation, does the Government in India have any other monitor of the cost of living for consumers? The answer is only a partial yes. The Ministry of Labour and Employment publishes a Consumer Price Index (CPI) separately for industrial workers (CPI-IW), for agricultural labourers (CPI-AL) and for all rural labourers. Each CPI series is meant to reflect the cost of living for a homogenous group of consumers. The basket of goods and services for the CPI is derived from group-specific consumer expenditure surveys, and weights for each item in the basket are assigned proportionate to the typical expenditure on that item.

Even leaving aside deficiencies in design of the index and in data collection, these indexes do not provide a true and accurate picture of inflation because of the lack of care of the government to keep them up to date by reflecting changes in the consumer expenditure patterns. The CPI-AL weights are based on household expenditure surveys of agricultural workers conducted in 1983 - this means that the consumption patterns from over 25 years ago are being used for determining the impact of rising prices on agricultural labour today! Other more recent surveys indicate that the index is over-weighted in food.

The CPI-IW weights, though revised recently, statistically represent working class families confined to only select industries and urban locations. The whole process of publishing the indices betrays the government's lack of focus and interest. CPI-IW is published only after a lag of two months; in contrast, the WPI is published with a time lag of only 2 weeks. Transparency is lacking with respect to pricing data and index computation. It is unlikely that the cost of services such as medical care and education are properly estimated.

The government appears to be a reluctant actor, publishing the CPI-IW only because of pressure from public sector industrial workers, whose dearness allowance (DA) - a compensation for inflation eating into their salaries - is linked to the index. The inflation as measured by the CPI-AL and CPI-IW is extremely important for another reason - it is used in arriving at the official poverty line (the new poverty line is determined by correcting the original poverty line established in 1979 for inflation). The poverty line identifies the families that will have access to government subsidies; underestimation of inflation denies access to families who should legitimately be covered.

The expenditure pattern of wage earners depends acutely on their income levels as on their location - village, small town, large metro - and possibility of access to subsidized services. Government employees for example get highly subsidized health services that are not available to most of the general public. Transport costs can be a significant burden on families in large metros.

Clearly, one size will not fit all and there is a need to monitor the cost of living for different sections of society to arrive at a true picture of consumer price inflation. The government however, has left out many sections of working people from the picture. The armies of self employed who constitute about 60 per cent of the rural and 40 per cent of the urban employed are not covered by any cost of living index. So are the unorganized urban workers.

Double digit inflation for the poor
The consumer price indices for industrial workers and agricultural labour, taken with all their weaknesses, show a picture of inflation entirely different from that shown by the WPI. Far from reaching zero or negative levels, the annual rate of inflation measured by the consumer price indices has been averaging just under 10 per cent for industrial workers and over 10 per cent for agricultural workers over the last 6 months of published data. The CPI indicates that even while the "overall economy" is considered stable from a price perspective, a large percentage of families may be experiencing economic destabilization due to increasing prices.

Escalating prices of food articles is the reason behind the continuing high inflation figures revealed by the consumer indices. It is a different issue that the CPI itself does not represent the cost of living accurately. The rate of increase in the wholesale prices for cereals, pulses and sugar - now around 12, 15 and 30 per cent respectively above prices a year back - is certainly an eye opener.

Inflation in food prices significantly affects a much wider section of the population than industrial workers and agricultural labourers. According to government statistics collected in 2005-06 (NSS, 62nd round), food accounts for 53 per cent of the average rural Indian's and 40 per cent of the average urban Indian's monthly expenditure. The poorer the family, the higher is the proportion of budget on food, and greater the impact. In this context, it is astonishing that the commercial media have maintained the constant refrain that inflation is zero or negative. Their obsession with WPI clearly shows a strong bias towards the interests of business to the virtual neglect of the interests of the common man.

Reliability and transparency in consumer inflation figures
In recent years, the focus of government policy has been entirely on achieving some sort of overall price stability in the economy, seen to be achieved by keeping the WPI inflation within certain limits. In the 5 years up to March 2008, the average annual inflation in the WPI more or less kept pace with the average annual inflation indicated by the consumer price indices. The situation over the last 6 months shows a divergent trend between WPI and the consumer indices.

Clearly, policies oriented towards stabilizing the WPI are not sufficient; consumer price inflation also needs to be kept in check and the vulnerable consumers protected. Such policies have been implemented in the western economies that the economists at the helm of our government so admire. In the US, for example, the consumer price index tracks the buying habits of 87 per cent of the population. Social security benefits are tied to the price index; so also retirement benefits for government employees and eligibility criteria for food stamp recipients.

In India, only government (and public sector) employees have some protection against inflation. Systems that could serve as a hedge against inflation for the 'aam aadmi', such as the public distribution system (PDS) for essential commodities, the public health care system and the public education system, have been allowed to decay; they need to be immediately revived.

But consumer price inflation can only be checked if its extent is known in the first place. There is an urgent need for reliable and transparent consumer price indices that covers the large majority of Indian families, from the poorest upwards. The absence of such data can only be interpreted as a lack of concern of the government for the living standards of the people. This is one "economic reform" that needs to be high on the agenda of the new government.