Most of us begin our day with newspapers accompanied by a cup of tea. Now, here is where confusion starts. The tea that you drink, the cost of its ingredients is increasing rampantly but the newspaper you read says Indian economy has a negative inflation. Now, you keep scratching your head thinking how can this be true? Perhaps, you dismiss off the inflation stats as misleading and useless and get back to work. To be frank, you are not completely wrong in dismissing them like this.

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The indices like wholesale price index (WPI) and consumer price index (CPI) are statistical tools used to measure it. These statistical tools actually do the trick and the case described above is ideally suited to understand how. The negative inflation that you read is actually the WPI, which is officially used to track inflation in India. WPI uses a sample set of 435 commodities for inflation calculation and the price from wholesale market is taken for the calculation. WPI currently in India gives 22.02 % weight to primary goods with food articles given a meager weight of 15.4 %. The problem doesn’t end here. The base year for the existing WPI series is 1993-94 and the items included in this and their respective weights have not been revised since 1999-2000.

The consumer price indices are also not in a very better state currently. India does not have an aggregate consumer price index (CPI). There are sectional CPIs for industrial workers (CPI-IW), agricultural labour (CPI-AL), urban non-manual employees (CPI-UNME) and rural labour (CPI-RL). These indices are released on a monthly basis. The weights of food articles and food products in these indices vary from 46 to 67 per cent. It was due to this higher weight given to food articles that they have been averaging around 8-10 % when WPI has been negative.

IMF stats reveal that only 24 countries use WPI to track inflation as against 157 who use CPI which actually takes into account the increases in prices which a consumer has to pay. Thus, India is in dire need of a composite CPI which is already used in most of the developing nations. Finance Ministry has announced plans of restructuring WPI and CPI by having 2004-05 as the base year and knocking thirty items off new series. It would definitely be better to have an index close to real inflation at the retail level than one which is incessantly trying to deflate the actual inflation.

–Aviral Utkarsh–