The government is working on two new comprehensive consumer price indices to effectively capture inflation at the individual level across the country.
“The consumer price index for urban areas will be ready by the end of the calendar year, while the rural one, which will cover a much larger number of Indians, will be ready only by next year,” said Pronab Sen, chief statistician and secretary, ministry of statistics and programme implementation.
About 72% of the population, or nearly 742 million people, living in rural areas, according to the 2001 census.
The new indices will also be useful for tracking poverty, which is usually measured separately for rural and urban areas using the National Sample Survey Consumer Expenditure data that is generated every five years. The same list of items will also be used to make the indices. Of late, urban poverty in India has increased because of large-scale migration.
Compared to many developed countries, for instance, the US—where inflation is measured only in terms of one consumer price index (since the rural population there is only 8% of the total)—the wholesale price index (WPI) is the measure widely used to track headline inflation in India.
“But all said and done, the WPI is still a measure that is tracking producer price inflation, since the 435 items it covers include many industrial inputs. An effective way to track consumer price inflation is still lacking in India; there is nothing that takes into account the trade and transport margins which can create a vast difference between the prices at the farm and the fork in different parts of India,” says Sen.
This is in tune with the recommendation made by C. Rangarajan, previous chairman of the National Statistical Commission set up in 2000 for exploring ways to update and modernize the existing system for data collection. The system, despite its overall good reputation of being relatively accurate and thorough, was unable to capture the changing needs of a growing economy and its people.
Rangarajan had pointed out that there was a need for a separate index for measurement of inflation in the Indian economy, and had suggested a consumer price index for rural and urban areas.
He had also suggested computing a combined index from the two indices.
There is, however, no plan to stop using the WPI to measure inflation because it is used by the producing sector. But it will also be revamped to make it more of a producer price index, “while the CPI will be a more state-of-the-art commodity index which will vastly improve the way inflation gets translated to the commoner,” says Surjit S. Bhalla, member of the National Statistical Commission, and president, Oxus Research.
Apart from the new indices, a committee headed by Jawaharlal Nehru University professor C.P. Chandrasekhar is looking at constructing a service price index, since the services are currently not included in the WPI. This index was also recommended by Rangarajan, who wanted it to be eventually subsumed in the WPI. Current chairman of the commission Suresh D. Tendulkar recently told Mint that its job of looking at a new poverty line would be delayed because the price data were not up-to-date.
India already has four consumer price indices for different categories of workers. However, the WPI is used because, one, among the five indices, the WPI covers the largest number of items, ranging from basic foodgrains to industrial products; and two, some of the consumer price indices are not only biased towards food items, they also have very old bases and cover a very small section of the population, thus failing to capture the changing realities.
For instance, the consumer price index for industrial workers (CPI-IW), the main index currently used to track retail inflation, covers only 8% of the population. Consumer prices are also calculated for urban non-manual employees (CPI-UNME), agricultural labourers (CPI-AL) and rural labourers (CPI-RL). Food items have an unusually heavy weight in all but CPI-UNME. The rural ones give 69% weight to food items, compared with less than 12% in the WPI. This is why CPI inflation have been much higher than the WPI inflation all of last fiscal year. Rural CPI inflation touched almost 10% in January, mainly because of higher wheat prices, even as WPI inflation was below 7%.
The main use of the four CPIs is in adjusting wages for inflation. As a result, trade unions have been strongly opposed to them being abandoned, says Bhalla.
It is not known yet what will be their fate. However, says independent economist Bibek Debroy, “It is important to change not only the base and the basket of commodities, but also the method and processes used to compute these indices, which have been strongly criticized. Even the time taken for data collection is pretty long. These things must improve for the indices to be effective”.
The CPIs are computed by the Labour Bureau. The CPI-UNME is computed for 23 items of consumption in 59 cities, while the CPI-IW is computed for over 300 items in 79 cities. The rural CPIs are computed for 194 items in 20 states. Only the CPI-IW was updated recently to a base year of 2001, while the CPI-UNME has a base of 1984-85 and the rural CPIs have 1986-87. Even the WPI has a base that’s more than 10 years old—1993-94. The new indices will cover every state thoroughly and will also raise/rationalize the number of items significantly, though the exact number could not be known.
Rangarajan’s report had also sought a national price data collection system, changing the base of all indices every five years, and bringing it under the umbrella of Collection of Statistics Act, 1953.