Time lag the issue with price indices

Economists say no need to discard WPI

MUMBAI: The Reserve bank of India’s (RBI) move to release a discussion paper on harmonisation of consumer price index has drawn a mixed reaction from economists.

While some welcomed the move as a step in the right direction others said the system would need to be tested to make sure that it was the right one.

The discussion paper by the central bank suggests using the CPI for industrial workers, urban non-manual employees and rural workers, to compute a harmonised index.

“Ideally, a measure of inflation should cover the entire gamut of goods and services, being purchased by a consumer in the domestic market and should represent the entire spectrum of population in a country. Thus, there had been a long felt need to develop a measure of CPI, which can meet these objectives,” the RBI said on Thursday.

Currently there are four different measures to compute CPI in India, divided according to different population groups. CPI is computed differently for industrial workers, urban non-manual employees, agricultural labourers and rural labourers.

However, there are some limitations for the present system such as the base year for
each CPI is also different, ranging from 1982-1987.

Also, there is a one month time lag for the CPI figures, so CPI figures for October will only come out in end of November.

“The consumer basket has also changed like the cost for services in the urban areas is higher than for example food, there are also new commodities in the consumer basket such as cellphones which were not existent in the mid-nineties,” said Shuchita Mehta, chief economist, South Asia, Standard Chartered Bank.

The most-watched an inflation figure in India is based on the wholesale price index mainly because it is available every week with only a two-week lag.

However, world over, CPI is a common parameter to gauge inflation. “The RBI’s main aim in releasing this discussion paper may be to find out a true measure of the overall inflation in the economy and also to make it comparable with the rest of the world,” Mehta said.

Accuracy and timeliness of data is also most important to Samiran Chakraborty, chief economist with ICICI Bank.

“Personally I think the system which is most accurate will be the best. But the new system will have to be tested for about 1-2 years,” Chakraborty said.

RBI’s ‘harmonised’ approach is similar to the one used by the European Union where weightage is given to different items and the CPI is computed on the basis of the aggregate. So when a price of an item increases, its weightage will automatically change, StanChart’s Mehta said.

However, some economists are of the view that the present system of segmented indices representative of different consumer baskets is fine, while admitting that the time lag was the main limitation.

In fact the RBI in its discussion paper has also listed some limitation of the proposed system, including that the population groups are not representative of the entire population and an averaging of the population may have an element of bias.

Also, as the base period of the three CPIs is different “certain simplification is involved in converting them to a common base, using ratio of average indices as linking factor,” the RBI said.

The RBI has asked to view the new harmonisation “cautiously”. It has also not said as to what will happen to the present system and chances are that the wholesale price index may also be continued.

“This system does not mean that we discard other inflation measures like the WPI. The WPI can be used to judge the inflation in the manufacturing sector. In countries such as the US there are different measures used like PCE, CPI, PPI. But there has to be a balance between the accuracy and the time factor,” Mehta said.