Price inflation - the untold story

 

 

MUMBAI: In an exhaustive analysis of the behaviour of prices in India and abroad, the November 2006 issue of the Reserve Bank of India Bulletin, a self-congratulatory note is evident along with a hint of caution that price fever may erupt again.
“In India”, the review observes,  “headline inflation has largely remained controlled during 2006-07 so far….. Pre-emptive monetary and fiscal measures have helped in containing inflationary expectations although underlying inflationary pressures remain.”

 

The clear message is that the demon of inflation has been subdued and to ensure that he remains under leash, deft supply and demand management is necessary to contain the price rise within the range of 5 to 5.5% during the current fiscal. Is this a case of locking the stable after the horse has bolted? Government’s own figures on the inflation rate tell a different tale.

 

For the industrial worker, the year-on-year inflation for September 2006 stands at 6.8% — nearly double the rate of 3.6% in September 2005; for an employee in the higher echelons of the organised sector, the inflation rate has accelerated to 6.6% at the end of the first half of 2006-07 from 4.8% 12 months ago.

 

At least, these two segments of the workforce usually enjoy the benefits of indexation in that their wages get revised periodically by a change in the  dearness allowance component in response to a change in the representative price index; t their real earnings enjoy some degree of protection. 

 

When it comes to the rural masses, they appear to be in far worse predicament than their urban counterparts.

 

For a typical agricultural labourer, inflation rate during September 2006 has galloped to 7.3%; in the preceding year, it was a mere 3.2%. And for the average rural help-hand, he had to pay 7% more for his basket of goods and services, again more than double of what he had to shell out in September 2005 (3.2%).

 

To state the obvious, rural India is where our teeming millions live and a majority of them eke out a miserable living.

 

It is this class of people who are badly hit when inflation rages fiercely. And, it is precisely this segment of the population that is gripped by the epidemic of price fever.

 

These are inferences based of official statistics.

 

The government publishes four price index numbers catering to the four broad categories of people that comprise the population on a monthly basis - the index for industrial workers, the index for urban-non manual employees, the index for agricultural labourers and the index for rural labour.

 

Each of these indexes has a unique weighting pattern and contains the basket of goods and services used by them. When all the movement of all these four index numbers is analysed, it gives an insight into the trend in inflation rate for the country as a whole.

 

This is more reliable than the inflation rate based on the wholesale price index - on which the government and the RBI rely — wrongly, it should be stated.

 

Moreover, in the absence of an exhaustive retail price index, these indices are more representative of the underlying price trends in the economy. The only drawback is the time involved in the release of these index numbers.

 

Even so, better an accurate measure of inflation, though delayed, than a misleading figure derived from the wholesale prices.

 

This is underscored by the fact that, based on the above analysis, while the wholesale index suggests that the inflation rate is hovering around 5%, in reality, it is closer to the 7% mark.

 

If the common man is bemused by the weekly numbers on inflation, we know why.

 

 

For the industrial worker, the year-on-year inflation for September 2006 stands at 6.8% — nearly double the rate of 3.6% in September 2005

 

For an employee in the higher echelons of the organised sector, inflation has accelerated to 6.6% from 4.8% 12 months ago