The new focus of policy debates in India is now deflation, with newspaper headlines and TV discussions making it seem that this is either a completely unique phenomenon or a wholly destructive one for the economy. To that extent, this deflation-centred debate may prove misleading. But it can help as a reminder that India’s system of measuring inflation is misleading.
With last week’s headline inflation number at a record 0.27%, India appears set to experience mild and short-lived deflation. But how trustworthy is this statistic?
The headline inflation measure the government uses is an annualized Wholesale Price Index (WPI), a weighted average of wholesale prices. When the government says that inflation is at 0.27% for mid-March 2009, it means WPI has grown by 0.27% from mid-March 2008. But the price level from a year ago is barely a good base to judge anything by. A month-on-month figure would be far more effective.
Then consider that WPI may not be a good estimate of what consumers actually spend on food or fuel. Most countries rely on the Consumer Price Index (CPI) to guide policy. But the government releases CPI data separately for four sections of the population: industrial workers, urban non-manual workers, agricultural workers and rural labour. There’s no aggregate CPI number. The CPI change for agricultural workers was at 10.79% in February. A closer look at WPI data itself shows food inflation still at 7.11%.
Another way to gauge inflation, the gross domestic product deflator, is estimated to be at 4% in 2009-10, according to Bibek Debroy at the Centre for Policy Research in New Delhi. That’s still a substantial change in the price level.
The headline inflation number underpins powerful policy moves. The Reserve Bank has often relied on it to change the rates through which it manages liquidity in the system. It’s discomfiting to know that such large changes can be based on an inaccuracy.
Where economists have long known of defects in these statistics, there has been no revamp. Now, a month before the general election, ordinary consumers should know of and demand answers for these defects.
Should India revamp its statistical methods of measuring inflation? Tell us at firstname.lastname@example.org