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The Prime Minister and other ministers, central bankers and other sarkari thinkers have at various times expressed concern about inflationary pressures in the economy but are confident these can be contained and the growth rate maintained. One would rather ask just what number is of “concern” to the government — the rate of inflation per se or the fact that the number is not reliable.

At the national level, there are four Consumer Price Index numbers (CPI). These are
1. CPI for industrial workers (IW),
2. CPI for agricultural labourers (AL),
3. CPI for rural labourers (RL) and
4. CPI for urban non-manual employees (UNME).

While the first three are compiled and released by the labour bureau in the ministry of labour, the last one is released by the Central Statistical Organisation in the ministry of statistics and programme implementation.

The CPI numbers are considered only as partial indices since each one caters to specific segments of the population with different base years. The state level CPI numbers lack uniformity, like with the oldest base year being — believe me — 1939 (for a segment of Bihar). Less than 20 states compile and construct it, and a few have their base year after 1981-82.

The major concerns and discussions stem from the Wholesale Price Index (WPI), compiled by the office of the economic advisor in the ministry of industry on a weekly basis, based on the price quotations collected by the official as well as the non-official agencies. The main issues are pertaining to coverage and not reflecting the travails of the common citizen.

For instance, WPI inflation surged to its highest in three months at 3.75% on December 1, 2007 (y-o-y) due to wearing off of the base effect and high prices of food and certain fuels like naphtha and aviation turbine fuel.

When I was mentioning this to my students, one of them pointed out that idli prices have gone up from Rs 5 per two pieces to Rs 10 in the last six months and hence a particular item of his consumption had gone up by 100% in six months.

When I checked my past grocery bills, I realised urad dal has increased from Rs 40 to Rs 75 per kilo over the past year. Hence, we can see that the gap between wholesale and retail is significant and the regional variations are critical since wheat impacts people in the North much more than rice does. In recent times, even the South is consuming more of wheat due to increased number of bakeries and changing breakfast habits. Similar is the case for different types of dals and oils.

Also, there are issues pertaining to weights in the WPI basket and that of poorer segments. For instance food items have around 22% weightage in the WPI basket, but we all know that they constitute more than 60% of the consumption basket of a vast majority of people. Food inflation hurts the vulnerable segments and only a blind expert or deaf government can be oblivious of this important fact.

Even though annual inflation is still below the central bank’s fiscal year estimate of 5%, the inflationary expectations remain strong as a surge in global oil prices is yet to be passed on to domestic consumers.

The increased use of food crops at a global level, like corn and sugar fuel substitutes, is going to have significant impact in the coming years. This may well lead to advertisements like “do not eat and drive,” meaning you can do only one of those things.

The other major issue pertains to non-inclusion of large portions of the services sector, though it constitutes nearly 60% of our economy. Doctor’s fees has gone up by more than 100% in the last three years and so is cost of education and of many other services and rentals.

Unfortunately, adequate representation has not been provided to the burgeoning service activities. The CPI-IW covers industrial workers in seven sectors, namely factories, mines, plantations, railways, public motor transport undertakings, electricity generation and distribution as well as ports and docks.

Given the significant shift taking place in our employment situation in terms of a larger role played by the service sector including call centres and IT related organisations, it may be appropriate to completely redefine “industry” without adhering to its mid-nineteenth century definition.

One possibility is to consider outsourcing this important statistical activity to private agencies like Crisil or CMIE and the National Statistical Commission can monitor the accuracy of the data collection, sample frame and interpretation, etc.

The entire process of collection analysis and dissemination can be left to private agencies. This would result in a more reliable and timely inflation indicator.

This should be the first step in slowly outsourcing most of the data series and downsizing our statistical organisations, particularly at the state level, which are mostly ineffective. For instance, the state statistical departments come under the planning ministry in most state governments and being a planning minister is a punishment for many a state-level politician since planning itself is an oxymoron.

Otherwise, important numbers like inflation will not be trusted and the wide divergence between government figures and actual experience will continue to be politically explosive.

Next time a minister wants to know about inflation, our suggestion would be — just visit the nearest mahila mandal one afternoon. He will not only be able to gauge the level of inflation but also the method of computing it and will get adequate lessons in budgeting woes.

Views are personal. The writer can be reached at vaidya@iimb.ernet.in.