With the speed of change the world over and its impact on the Indian economy in the post-liberalisation period, it is being increasingly recognised that our present system of measuring inflation, based on the wholesale price index (WPI) needs to be improved upon. It is in this context that the recent proposal to change the frequency of measuring WPI from a weekly to a monthly basis assumes special significance.

The widely tracked WPI, one of the longest standing indices on prices and the only one in the world that measures inflation on a weekly basis, is set to undergo a complete makeover. It would now be available for only a dozen times a year in a monthly format, a practice followed by developed nations like the US, UK and Japan.

The advantages of moving to a monthly format are numerous. It will make the system more authentic, relevant and reflective of emerging realities, in line with international best practices. The accuracy of the index is perceived to increase on account of the availability of authentic data, thereby helping the government and RBI frame policies based on realistic price trends. Besides, it would also provide industry with a reliable index to calculate the price escalation clause in government contracts and enable units to make an assessment of the rising input costs, which in turn, would help in keeping production costs under check.

At present, the availability of quality data, which is crucial for the formulation of an authentic index, is a major problem. A weekly index does not provide time for information collection across sectors and if data is not received within the limited time frame, or there are doubts about its efficacy, then there is no time left for review.

Besides, a large number of items go unreported or when no fresh data is received, the last available figure is repeated, which distorts inflation measurement. The inclusion of services in WPI could further aggravate the problem due to ambiguities in data. Any policy formulation based on such inaccuracy would be inefficient and far removed from the emerging realities.

A switch to a monthly index provides sufficient time to collect the relevant price quotations from sources. This would improve the response rate, lend authenticity to data and reduce the difference between provisional and final inflation figures, which has a six-week gap at the moment.

A monthly index could also contribute towards removing dissonance between price movements reported by the WPI and other indices measuring price fluctuations on a monthly basis. For example, the level and pace of price change between the weekly WPI and the monthly CPI have lent diverse results causing uncertainty in the marketplace about prevailing inflation trends. It has happened between 2000 and 2002, when inflation based on the CPI-AL fell while the WPI rose. And when the CPI-AL went up, WPI decelerated.

Even today, figures for December 2007 show that while inflation based on CPI-AL was 5.90%, it was 3.60% according to WPI, a gap of 2.3 percentage points. A closer correspondence between various indices would help WPI relate with other indices and create confidence in business circles. A monthly WPI would be a significant step forward in this direction.

Doubtless, critics to the switchover maintain that the monthly index would increase the time lag from the present two weeks in reporting WPI data to six months. This would come in the way of making timely policy interventions by the government or RBI. In this context the question is: would it be proper to draw up policy based on an index, which does not capture economy-wide change in prices?

Another reason for adopting a monthly index is that price variations in the economy, especially in the manufacturing sector, are not as sharp. As a result, frequent monitoring, that is, on a weekly basis, may not be essential. However, the worst bouts of inflation in the country have been caused by spiralling food and fuel prices. This could be separately released on a weekly basis while having a monthly WPI index at the aggregate level.

No doubt, a monthly WPI is second best, but it is a practical solution to improve the accuracy of the index in the light of data scarcity. Hence, a weekly index, though desirable, may not be a viable option to gauge inflation in the country if the monthly option promises greater accuracy. However, the ultimate aim should be to shift towards a monthly producer price index with appropriate weights across commodities.

?The writer is a senior economist, PHDCCI