In the space of just one fortnight, the central government announced a 6% hike in the dearness allowance-the wage adjustment for rise in inflation-for its employees. Around the same time, several banks forecast that the inflation rate will hit zero by March-end.
Now, how does this happen? The answer is that the government and the organised sector in the country calibrate wage negotiations on the basis of the consumer price index for industrial workers (CPI-IW), while the wholesale price index (WPI) is used to measure the general inflation rate in the economy. The two are a clutch of four indices that the government agencies use to measure inflation in the economy. The other two are consumer price index for agricultural workers and the consumer price index for urban non-manual employees. Only the WPI is released weekly.
But a study of the CPI-IW shows that as it gives almost 50% weightage to food and another 15% to housing, including rents, the index is unlikely to track the WPI anytime soon.
No wonder any revision in the index is disputed. It was in 1988 that a technical advisory committee of the department of statistics decided there was a need to change the way this inflation was measured. It has taken almost twenty years for that work to finally get over, when the new series was launched in 2006.
Data from 78 towns are covered by this monthly survey to track the cost of living for industrial workers. To get an idea of the consumption pattern, data from 41,040 families are collected. And what does all this measure? It basically measures prices of vegetables, milk, cereals, pulses and fruit at local markets. Data is collected from two shops in markets designated by the state governments. So, seasonal and local fluctuations dominate the data.
The index gives a weightage of 46% for food prices. If one includes the weightage for pan, supari and tobacco that has a weightage of 2.27%, almost 50% of the index is built up by food. In developed countries, the comparable consumer price indices give a weightage of less than 20% to this category.
DK Joshi, chief economist at Crisil says CPI-IW is more a cost of living index and largely consists of food items that are showing a rising trend. ?Right now since the main food items like pulses, cereals are rising which is reflected in the CPI data, they are also the reason for the high food inflation.?
Food inflation at present, no doubt is high. Even as per the WPI, it is in double digit for the week ending February 28, largely due to increase in prices of cereals (11%), pulses (13%) and sugar (23%) and also due to rising rates of milk and fruit (both 7%) and vegetables and spices (both 9%).
The other interesting aspect of this index is the weightage for the services sector which is only 23.26%, against the 16.36% in the earlier index. As Pronab Sen, India?s chief statistician, says the data coming out of CPI-IW and WPI are often just not comparable.
For instance, as the National Sample Survey Organisation has found that expenditure on education and medical services now comprise more than 50% of the actual expenditure of even rural India, across all income groups. But these categories are grossly understated. So while local changes in food prices magnify the impact on the index, drop in prices of fuel or of medical or transport services has a far lower impact.
The other key reasons experts say why the CPI-IW has stayed up even when wholesale price index has come down so fast is the high weightage for housing sector. This category accounts for 15.27%, but is absent in WPI. The reason for the high weightage is the perceived growing importance of real estate in the living conditions of organised sector employees. But for calculation purposes, rents are not tabulated every month but revised only twice a year. So unless rents across India or housing prices fall secularly at this stage, there is rare chance for the consumer price index to follow suit.
According to economist Ajay Shah, high inflation is bound to be an electoral issue. But the best way to tackle the inflation problem is to improve the measurement and forecasting of inflation, and then establish a sound macroeconomic policy framework that delivers low and stable inflation.
•CPI?s high weightage to food and housing also implies that it is not going to track the falling WPI anytime soon
• In India, CPI gives food a weightage of around 50%, but in any developed country it is less than 20%
• Food inflation in WPI is also high because of high prices of cereals, pulses and sugar
• Local changes in food prices magnify their impact on CPI, but fall in fuel prices or cost of transportation has far less impact.
(Concluded)
