New Delhi: In a move that could better reflect actual price increases borne by the general population, India will on 18 February introduce a national consumer price index (CPI) that is expected to eventually replace the Wholesale Price Index (WPI) as a benchmark for inflation.
Although the widely-used WPI showed the inflation in food articles at 13.55% for December, consumers may have been facing greater rate increases, indicates a recent letter finance minister Pranab Mukherjee wrote to state governments.
“While there are some weather-induced supply constraints on some of these items, which go against the seasonal decline normally seen at this time of the year, a large part of price rise is due to widening gap between the wholesale and retail prices and the growing demand for these products due to rising income levels,” he wrote earlier this month.
The new index has the potential to become the single index of reference for inflation, saidD.K. Joshi, chief economist at ratings firm Crisil.
“The Reserve Bank of India (RBI) needs one inflation index to rely upon,” Joshi said. “As the CPI will consist of service sector data, it should become the key indicator.”
Central banks across the world rely mostly on CPI data to decide monetary policy, unlike RBI, which uses WPI as the key inflation index.
G.M. Boopathy, deputy director general at the Central Statistical Office (CSO), which is in charge of the task, said the first set of the new consumer indices, which also includes CPI urban and CPI rural, will be released on 18 February.
“We will also simultaneously release state and Union territory-level CPIs,” he said.
The statistics and programme implementation ministry, which administers CSO, had promised the standing parliamentary committee on finance headed by Bharatiya Janata Party leader Murli Manohar Joshi in April that the indices will be released before 20 February.
The new indices will temporarily have calendar 2010 as the base year, which will be shifted to 2011-12 once the 68th round of consumer expenditure survey is completed, Boopathy said.
The National Sample Survey Organisation is collecting data for urban centres and the statistics ministry has roped in the postal department to collect price data from villages.
“Data is being collected from 1,183 villages and 310 towns across India for the all-India CPI,” Boopathy said.
There is still some concern regarding the flow of data, which is being sorted out, said India’s chief statistician T.C.A. Anant.
Boopathy said any new index will take time to stabilize.
India currently has three consumer price indices besides WPI that include gauges for industrial workers, agricultural labourers and rural labourers.
Work for a comprehensive CPI started in 2008 when the country saw an inflationary surge as measured by WPI. The finance ministry instructed the statistics ministry to hasten the process for releasing an all-India CPI as it was of the view that WPI-based inflation overstated the level of the price rise in the economy.
R. Radhakrishna, chairman, National Statistical Commission, the apex body on core statistics, said the body had earlier cleared the methodology for calculating the new CPI.
To be sure, it is unlikely that RBI will move in haste to adopt the new CPI as a benchmark.
In a 2009 report of a committee on financial sector assessment, chaired by then deputy governor Rakesh Mohan, the central bank had said switching over to CPI as the only inflation indicator is not an immediate imperative.
“Given the economic and demographic diversity that exists in India, a combination of different measures of inflation gives useful information on diverse aspects that is found to be meaningful in formulating an appropriate policy,” it said. “Relying on a single index might result in loss of information on some crucial sectors and might be less useful in tackling the diversity of issues.”
The divergences in alternative inflation measures complicate the conduct of monetary policy in India, RBI governor D. Subbarao said in August 2009. “The Reserve Bank looks at all the measures of inflation, both overall and disaggregated components, in conjunction with other economic and financial indicators, to assess the underlying inflationary pressures.”
In an interview on 29 August, Anant had argued against using CPI for monetary policy purposes.
Former RBI governor and chairman of the Prime Minister’s economic advisory council C. Rangarajan said the new index will give a better picture of consumer price movement across the country. “We need to test the new index for some time before using it for (monetary) policy purposes,” he added. Rangarajan was the first chairman of NSC, which had recommended establishing an all-India CPI.
National Institute of Public Finance and Policy professor N.R. Bhanumurthy said the new CPI will add value to the process of monetary policymaking. “It might also reduce the huge divergence between WPI and CPI inflation, which is common now,” he said.