We hear ever-increasing dissonance about data on prices, and on an apparent paradox that has developed over the past few months. The problem is this. One, the most widely reported data on inflation relates to the Wholesale Price Index (WPI), which has been negative for the past month, and is likely to remain so for another month. Also, as anyone who buys consumer staples knows, the prices of foodgrains, fruits, vegetables etc (and even some manufactured products as well) has zoomed upwards since the past year, and seems to have accelerated during the past couple of months. This has inevitably led to an intensification of the skepticism about the relevance of the current WPI?s composition, and more recently about the appropriateness of the methodology of inflation computation. More on this later. First, however, some information on the current sub-stories of prices and inflation. The negative WPI inflation, of course, is due to the very high price levels and indices during the corresponding weeks last year. So even though prices of commodities are increasing even now, most are not rising as fast as last year.
The exception to this are food prices, and in general, those of ?primary commodities?. Inflation in this category has remained more sticky upwards than the manufacturing and fuels segments of the WPI, and is currently around 6%. Also, foodgrains (cereals and pulses) are only about 5% of the WPI, out of the total 22% weight of primary commodities. The pulses component of the WPI has been rising at 15 – 19% for the last two months. Sugar, with a weight of almost 4%, has been a major contributor. At the same time, CPI inflation for urban and rural consumers was 9% and 11%, respectively, in June 2009. Food accounts for a much higher share of these indices, and the consequent higher inflation. These indices are doing their job (for the most part) in capturing the phenomenon of rising food prices. In truth, the rising food prices are more a result of a long-term neglect of agriculture, of crop productivity, of water efficiency, and a host of other issues. Food supplies have just not been able to keep pace with the sheer rise in disposable incomes and overall demand.
Although there has been much debate on the representativeness of the current compositions of and weights in the indices (and the problem is acknowledged and is being addressed with a forthcoming new WPI), the capture of primary commodities prices is actually considered to be better than of manufactured ones, since the former is taken from all the major mandis and wholesale markets.
So, can inflation be measured in a manner that conveys the price situation with more authenticity and realism? In India, we normally compute ?year-on-year? inflation. Mostly in developed markets, the inflation numbers are presented as, say, 4% SAAR (Seasonally Adjusted Annualised Rate).
Essentially, this means that inflation is measured on a ?previous period? basis, rather than over the corresponding period of the previous year. Since much of economic data, significantly that for prices, is very seasonal, this method can only make sense if the relevant data series is de-seasonalised. After that, to make the numbers from the two methods comparable over a yearly time horizon, the second set is multiplied by the appropriate time multiple to scale the period to a full year.
Bibek Debroy
At the time this is written, point-to-point WPI available is for week ending August 1st. By the time this is published, point-to-point WPI will be available for week ending August 8th. However, underlying trends won?t change. On annualised basis, point-to-point WPI shows inflation of ? 1.74%. Any inflation measure is conditional on base, basket of commodities, their weights, aggregation and kind of price data used. WPI has weight of 22.02% on primary articles, 14.23% on fuel, power, light and lubricants and 63.75% on manufactured products, though manufactured products also includes a sub-category of food products. CPI trends are completely different. There are effectively two CPI series now. CPI-UNME (urban non-manual employees) has been discontinued and CPI-AL (agricultural labour) and CPI-RL (rural labour) have been clubbed. So we have CPI-AL/RL and CPI-IW (industrial workers). For both series, as of today, we have data for the month of June 2009. Data for July will become available towards the end of August. With a base of 100 in 2001, in June 2009 the CPI-IW was 153 and the June 2008 index was 140. This is an inflation rate of 9.29%, quite contrary to what WPI shows and the CPI-AL/RL trends are no different.
At this point, a quote from Economic Survey 2008-09 is appropriate. ?The WPI has the advantages of a comprehensive and economy-wide coverage and the weights in the commodity basket are based on the value of quantities traded in the domestic market. The CPIs are consumer group-specific and measure the changes over time in the general level of prices of goods and services consumed by the group, with the commodity basket being based on consumer expenditure surveys and the weights proportionate to the expenditure…the reason for higher values of CPI inflation from December 2008 owed to the higher weight of food articles in the CPIs relative to WPI. The combined index of food articles and food products in the WPI, CPI-IW and CPI-RL is around 25%, 46% and 67% respectively. In addition, the prominent decline in inflation in the fuel group in the WPI was not reflected in the CPIs, as the weights assigned to fuel are lower and only kerosene and coking coal are included in the CPI basket.? Both WPI and assorted CPI-s are in the process of being revamped. Pending that, a large part (not all) of the difference in inflation between the two series is explained by food inflation.
Let?s assume you were an industrial worker in Guntur and let?s stick to Labour Bureau?s consumer prices. Rice prices per kg went up from Rs 17.99 in May 2008 to Rs 27.43 in May 2009. Atta prices per kg went up from Rs 28.10 in May 2008 to Rs 32.00 in May 2009. Arhar dal prices per kg went up from Rs 37.25 in May 2008 to Rs 56.00 in May 2009. The cost of 1 kg of goat meat went up from Rs 200 in May 2008 to Rs 220 in May 2009. The cost of 1 litre of milk went up from Rs 20 in May 2008 to Rs 22 in May 2009. Onions went up from Rs 6.75 a kg in May 2008 to Rs 11.00 in May 2009. Sugar increased from Rs 17.21 a kg in May 2008 to Rs 23.90 in May 2009. Examples can be multiplied for other products and from other parts of the country. There will now be a tendency to blame everything on drought, though increase in food prices preceded the drought. On August 14th, IMD finally announced that overall rainfall had been 29% of the LPA. Of the 36 meteorological sub-divisions, there was excess rainfall in 9, deficient rainfall in 25 and scanty rainfall in 2. This is for the period 1 June to August 12th. The scanty regions are Haryana and Chandigarh and Delhi and Western UP. The excess rainfall has been in Saurashtra and Kutch and Diu. There has been normal rainfall in Orissa, Madhya Maharashtra, Southern Interior Karnataka, Konkan and Goa, Coastal Karnataka, Kerala and Lakshadweep. Everywhere else, there has been deficient rainfall. 50% of India?s districts have had deficient rainfall and 22% of districts have had scanty rainfall.
Unlike a meteorological drought, a hydrological drought occurs when there is a depletion of surface water and lakes, rivers and reservoirs dry up. The Central Water Commission (CWC) monitors water levels in 81 major reservoirs. These reservoirs have a total capacity of 81 billion cubic metres (bcm). The delayed monsoon meant that on June 25th, the total storage was only 13 bcm, 9% of storage capacity. However, by August 13th, it had increased to 57 bcm, 38% of storage capacity. In the last 10 years, the average storage at this time of the year was 45% of storage capacity. So we are still short of the comfort zone. But even a hydrological drought doesn?t necessarily lead to an agricultural drought. The third type of drought occurs when inadequate soil moisture results in acute crop stress and leads to a fall in agricultural productivity. The Finance Minister has said that 161 out of 604 districts have been declared drought-prone. He did not specify the names of the districts. However, states have declared several districts as facing drought or drought-like conditions. As of August18th 2009, 246 districts have thus been declared and they are in the states of Assam, Himachal, Jharkhand, Manipur, Nagaland, Bihar, Karnataka, Maharashtra and MP.
The present drought affects the kharif crop, which can sometimes be compensated by the rabi crop. For the kharif crop, Agriculture Ministry uses the following early warning signals for a drought. Delay in onset of south-west monsoon; long ?break? in activity of south-west monsoon; insufficient rains during the month of July; rise in price of fodder; absence of rising trend in reservoir levels; drying up sources of rural drinking water supply; and declining trend in progress of sowing over successive weeks. On August 13th 2009, the National Crop Forecasting Centre said the following. ?As on August 7th 2009, all-India area sown under kharif crops was 764.73 lakh hectares, which is 33.6 lakh hectares, 4% less than the area coverage in the corresponding period of last year. Major decline in area is under Paddy crop (57.8 lakh hectares) mainly contributed by the states of Uttar Pradesh, Bihar, Jharkhand and West Bengal. Area under Pulses was reported to be 78.91 lakh hectares, which is 9.2 lakh hectares more than the last year. Major increase was in case of Tur crop (5.3 lakh hectares) particularly in the states of Karnataka and Maharashtra. Area under Oilseeds was reported to be 150.72 lakh hectares, which is 5.4 lakh hectares less than the last year. Decline in area is reported under Groundnut (9.8 lakh hectares), mainly in the states of Andhra Pradesh and Gujarat.?
So the crop scenario isn?t that bad yet, though there will be increased food price inflation for edible oils, pulses and sugar. PDS doesn?t cover these. Nor does it cover fodder and the impact of lack of fodder can be fairly serious for animals. Buffer stocks and PDS don?t cover coarse food-grains either. But since food price inflation preceded drought, though drought may aggravate it, reasons lie elsewhere. And one isn?t talking about lack of farm reforms that have impeded increases in agricultural productivity, a supply-side problem.
Nor is hoarding and speculation the only answer, since price increases have also characterised products that can?t be stored. There has clearly been increased demand in rural India, courtesy higher procurement prices, debt relief and NREGS. And of surpluses available for urban India, perhaps a part of it has now been garnered by organised retail. Since these are desirable trends, this is also an opportunity to address the supply side.