Official estimates show that consumer price indices in India continue to rise in double-digit levels. These levels are unexpectedly high, given that wholesale price levels have come down by around 730 basis points from peak levels of 12.5% in August 2008 to 5.2% in January 2009 to near zero now. In fact, the double-digit consumer price inflation in India puts it at par with an odd list of a dozen odd widely mismanaged economies where retail prices continue to soar much above global benchmarks like Iceland (15.2%), Russia (13.9%), Ukraine (20.9%), Vietnam (11.3%), Pakistan (21.1%), Kuwait (11.6%), Kenya (25.1%), Costa Rica (12.8%), Guatemala (13.7%) and Venezuela (29.5%), Egypt (13.5%) and Iran (24%).
India?s inability to roll back the accelerating trends in consumer prices seems especially galling since most other countries have had remarkable success in pushing down retail price increases especially after the bust of commodity prices. Among developed countries the highest fall in consumer prices over the past one year has been in the US where it was pushed down by 380 basis points to just 0.2% by February 2009. In the EU, consumer prices have fallen by 210 basis points over the last year to 1.2%. The fall in consumer prices was also extensive across the transition economies in Europe with consumer price numbers going down by more than 500 basis points in many countries. Consumer prices have also fallen in vast swathes of Middle East and South America.
The divergence between WPI and CPI is in sharp contrast to the experience of most other countries where the fall in wholesale or producer prices have been accompanied by a substantial fall in consumer prices too. For instance in the case of developed countries like the EU the reversal of the producer prices increases from the peak levels of 9.1% in July 2008 to a fall of 0.5% in January has been accompanied by a deceleration in consumer prices by almost three-fourth from 4% to 1.2% during the period. In South Korea, the slowdown in producer price increases from 12.3% to 4.7% during the period ensured that consumer prices fell, albeit at a slower pace from 5.9% to 3.7%.
India?s only hope now is that that the sagging wholesale prices increases, will help bring down consumer prices to more reasonable levels. But unfortunately many hurdles continue to stand in the way of consumer prices matching the gains made in the wholesale prices. These include both methodological problems and regulatory policies which distort the consumer price levels, especially that of food.
On the methodological front the most conspicuous one is the outdated consumption basket in almost all consumer indices that distorts the price levels beyond all reasonable levels. For instance take the case of the index for urban non manual employees that is based on a Family Living Survey conducted in 1982-83 and is very far removed from the consumption pattern in 2009. This is also true of the consumer indices for agriculture and rural workers based on consumption patterns in the mid eighties. Even the index for industrial workers consumer, revised in 2000, fails to capture the changes in consumption patterns.
The distortion of the consumer prices is best highlighted by the share of food, beverages and tobacco in total consumption basket in the various indices which vary from 47% for urban non manual employees, 48.4% for industrial workers, 70.5% for rural workers and 72.9% for agriculture workers. These are all likely to be gross exaggerations as the national account statistics show that the share of food has steadily declined from 48.2% in 2000-01 to 42.3% in 2007-08. It is only reasonable to presume that consumption patterns of other products and services would have only changed even more dramatically over the recent high growth phase ensuring that actual increase consumer prices at the national level is very different from the numbers portrayed in the consumer indices of the different segments.
?p.raghavan@expressindia.com