That a new price index is required is something few would counter. Analysts have been looking at the movement of the Wholesale Price Index (WPI) as a comprehensive indicator of movements in prices of (at least) manufactured products, services not being covered in the WPI. In the world of the WPI, all Indians wear one of the two items of clothing?dhotis and sarees?and ?drive? around in either bicycles or two-wheelers or jeeps. The WPI covers prices of 435 commodities, but not the car, the cell-phone, the washing machine or any readymade garment, except the ones mentioned earlier. And that?s just scratching the surface.
These apart, we move over to recent confusion on inflation for the year that was, FY06. All inflation-watchers have been a little surprised by the un-Indian 4.5% overall, and 3.1% manufactures? sub-group?s inflation for FY06 (especially compared with FY05?s 6.6% overall, and 6.4% for manufactures). Is it because the WPI has not been updated properly?
If it were true that low inflation for FY06 is because of data for some products not being revised on time, the same logic could be applied for FY05. In fact, for all past years. Unless one has reason to believe that in FY06, data has not been updated to reflect true changes in prices of some key products, this line of thinking makes little sense. A look at the detailed breakup of the WPI index does not suggest the latter.
Second, precious metals like gold and silver, which are at record highs, are not part of the WPI.
Third, weights are important. True, prices of non-ferrous metals like aluminum, copper and zinc have increased through the year, but their respective weights in the overall index are 0.85, 0.35 and 0.14%. So, though the WPI indices for aluminum, copper bars & rods and zinc show price increases of 6.7, 40.8 and 56% through FY06, they contribute not even 1/25th to the overall inflation of 4.5%.
? That we need a new price index is something none would disagree with ? Yet, the lower rise in FY06 does seem attributable to hard facts ? Manufactures did rise less and this, not lagging data, seems the real cause |
The ferrous ?metals and alloys? product-group is a heavyweight, about 6.2% of the overall WPI index. In FY05, this sub-index (basically iron and steel) rose by 20.6%; in FY06, it fell by 4.5%. Even if this group?s prices were to remain at the elevated levels of FY05, a base-effect was bound to kick-in, but this was compounded by FY06 levels actually falling. Hence, while contributing significantly to inflation in FY05, nothing of that sort happened in FY06. This reversal in prices closely followed that in the international markets. Excess capacities in China, availability of cheaper imports put downward pressure on domestic steel prices.
% Rise (point-to-point) with and without ferrous metals and alloys | ||||
| ? | Manufacutred WPI | Modified manufactured WPI | Overall WPI | Modified overall WPI |
| ? | (M) | (M)(M) | (WPI) | (M WPI) |
| In FY 05 | 5.5 | 3.3 | 5.7 | 4.5 |
| In FY 06 | 1.0 | 2.7 | 3.5 | 4.6 |
In order to check if lower ferrous metals? and alloys? prices were at work behind the relatively benign manufactures, and in turn overall inflation in FY06, we create a separate index. This modified manufacturing index (MM) does not include the sub-group of ferrous metals and alloys. Using MM, we construct the modified WPI (M-WPI), keeping the fuel and primary goods? indices same across both versions. For FY06, manufacturing (and overall) prices post a higher rise after removal of ferrous metals and alloys than with their inclusion. The opposite holds for FY05, as expected.
To conclude, the manufactures? group?s price rises and, hence, the overall WPI?s rise in FY06 was lesser than the previous year, and had nothing to do with any non-updation problem of official data. Though prices of manufactured products like cement, cotton textiles and non-ferrous metals witnessed higher gains in FY06, the majority witnessed lower gains as compared to last year. The decline in ferrous metals? prices, coupled with their significant presence in the index, further muted the overall WPI?s gains.
?The writer is an economist with a financial services organisation. The views are personal