What’s in a number? one might ask. Depending on which number, there may be very little or a lot riding on it. In the case of India’s inflation number, it’s curiously both: To some economists, it means nothing; to some businesses, it means the world. But what does it mean to India’s central bankers?
Last week, India witnessed the year-on-year (y-o-y) change in the Wholesale Price Index (WPI) turn negative, at -0.61%. If there was ever a case where statistics belonged in the same phrase as “lies” and “damn lies”, this would be it.
This “deflation”, as markets are terming it, is only because of last year’s high base effect when inflation edged up to at least 12%. But if we ignore the y-o-y change, WPI has increased 0.4% since the first week of May. Even in last week’s WPI statistics, various commodity groups rose.
As we’ve argued repeatedly, India’s statistics regime needs a revamp. WPI is based on a basket of 435 items—these items and their weightage were last revised in April 2000. It’s also hard to rely on the Consumer Price Index (CPI), the lead indicator of inflation in developed countries, since there’s no aggregate figure.
All this has persuaded most economic watchers that these numbers matter little. A Citigroup report predicts that even with negative WPI the next two-three months, this index will rise to 4% by the year-end. With central banks worldwide increasing money supply, inflation is the danger here—not deflation.
Businesses may think otherwise. If TV business channels are any guide, companies may be treating every Thursday’s WPI release like the nail-biting finish to a cricket match. A continuous decline in WPI may send a different signal to businesses: Corporate executives may interpret lower WPI as slacking demand, and may reduce prices to improve sales. In this case, companies will also clamour for the Reserve Bank of India (RBI) to keep its punchbowl around.
The good news here is that RBI may be considering withdrawing the punchbowl. RBI governor D. Subbarao noted on Saturday that deflation wasn’t a concern; rather, higher commodity prices are cause for anxiety.
Central bankers usually rely on a host of numbers to help them determine interest rates. At this time, WPI inflation is one number they needn’t rely too much on.
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