Target practice in a dark room

Target practice in a dark room
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First Published: Tue, May 20 2008. 12 03 AM IST
Updated: Tue, May 20 2008. 12 03 AM IST
Imagine trying to shoot at a target in a dark room with a gun which fires two minutes after the trigger is pressed. Now, think of inflation and the Wholesale Price Index (WPI) that measures it. What is of concern here is that the incompetent shikari is a government that can’t get its act right.
Since December 2007, roughly a month before inflation began to gallop, final WPI figures have been consistently higher than the provisional figures. The latter figure is revised eight weeks later, once more complete data is in place. For example, the provisional value of the index on 8 March was 221.8. This was revised and reported on 3 May to stand at 225.7. As a result, based on the annual, point-to-point calculation, inflation increased to 7.78% from 5.93% by a mere stroke of the pen.
Two things happen in this situation. One, real-time knowledge of inflation is not possible in the system. Two, by the time the information becomes available, prices have hardened and economic agents, producers and consumers alike, have formed expectations about inflation. In the age of instant communication, reactions are instantaneous and the mere announcement of the WPI figures causes stock markets to fluctuate wildly. Any fiscal and monetary steps taken after this lose effectiveness. But the damage extends into the future as the present slowdown in growth shows.
Part of the problem lies in the poor price data collection mechanism under the Collection of Statistics Act, 1953. For example, at the moment of compilation, less than 20% of manufacturing data is available with statistical authorities. The data on primary commodities is more complete. This alone skews the index. In the intervening period, from the announcement of provisional to the final figures, data percolates. At times, this is no more than 60-65% of that required to “complete” the index. This is, of course, ignoring the fact that services do not find place in the WPI and that double counting of various goods (for example, iron ore, various iron products, all the way to finished steel) badly skews the index.
There are plans for revision and changing the periodicity of reporting the data. But until then, it’s a gun that fires too late.
What can be done to make the WPI more accurate? Write to us at views@livemint.com
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First Published: Tue, May 20 2008. 12 03 AM IST