Download - Inflation Calculation India
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Inflation in India
.
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. Some economists assert that
India's method of calculating
inflation is wrong as there areserious flaws in themethodologies used by the
government.
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. A research paper arguing
that the governmenturgently needs to shift themethod of calculating
inflation.
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. Saying that there are
serious flaws in the presentmethod of calculatinginflation, the paper India
should adopt methodologiesin developed economies.
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. Most developed countries use
the Consumer Price Index (CPI)
to calculate inflation.
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Wholesale Price Index (
WPI
WPI is the index that isused to measure the changein the average price level ofgoods traded in wholesale
market.
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. In India, a total of 435
commodities data on price level
is tracked through WPI which isan indicator of movement inprices of commodities in all
trade and transactions.
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. It is also the price index which is
available on a weekly basis with the
shortest possible time lag only twoweeks.
The Indian government has takenWPI as an indicator of the rate of
inflation in the economy.
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Consumer Price Index (
CPI)
CPI is a statistical time-seriesmeasure of a weighted average
of prices of a specified set ofgoods and services purchasedby consumers.
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. It is a price index that tracks
the prices of a specified basket
of consumer goods andservices, providing a measureof inflation.
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. Economists Shunmugam and
Prasad say it is high time that
India abandoned WPI andadopted CPI to calculateinflation.
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. India is the only major country that
uses a wholesale index to measure
inflation. Most countries use the CPI as a
measure of inflation, as this actuallymeasures the increase in price that a
consumer will ultimately have to payfor.
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. "CPI is the official barometer of
inflation in many countries such
as the United States, theUnited Kingdom, Japan,France, Canada, Singapore and
China.
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. The governments there review
the commodity basket of CPI
every 4-5 years to factor inchanges in consumptionpattern," says their research
paper.
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. It pointed out that WPI does not
properly measure the exact price
rise an end-consumer willexperience because, as the samesuggests, it is at the wholesalelevel.
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. The paper says the main problem
with WPI calculation is that more
than 100 out of the 435commodities included in the Indexhave ceased to be importantfrom the consumption point ofview.
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. India constituted the last WPI
series of commodities in 1993-94;
but has not updated it till now thateconomists argue the Index haslost relevance and can not be thebarometer to calculate inflation.
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. Shunmugam says WPI is supposed to
measure impact of prices on
business. "But we use it to measurethe impact on consumers.
Many commodities not consumed byconsumers get calculated in the
index.
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. And it does not factor in
services which have assumed
so much importance in theeconomy," he pointed out.
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But why is India not switching over to the
CPI method of calculating inflation?
Finance ministry officials pointout that there are many
intricate problems from shiftingfrom WPI to CPI model.
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. First of all, they say, in India,
there are four different types of
CPI indices, and that makesswitching over to the Indexfrom WPI fairly 'risky and
unwieldy.'
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. The four CPI series are:
CPI Industrial Workers;
CPI Urban Non-Manual Employees;
CPI Agricultural labourers;
and CPI Rural labour.
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. Secondly, officials say the CPI
cannot be used in India
because there is too much of alag in reporting CPI numbers.
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. The WPI is published on a weekly
basis and the CPI, on a monthly
basis.
And in India, inflation iscalculated on a weekly basis.