INFLATION: Change, but not yet wholesale

  • The Cabinet Committee on Economic Affairs has given its approval on the much needed & awaited revamp of the WPI
  • WPI taken to be a major indicator of Inflation in India  will now be calculated on a monthly rather than a weekly basis
  • This change in the periodicity was based on the recommendation of a working group headed by  economist Mr. Abhijit Sen, member Planning Commission
  • Monthly system, followed globally, will be followed for manufactured subgroup in tandem with the overall WPI
  • However, in order to monitor prices of agriculture commodities & petroleum products, a price index for primary & fuel, power, light & lubricant group will be reported on a weekly basis
  • The first such weekly report was released on the 5th Nov for the week ending 24th Oct, 2009
  • Reporting of the monthly WPI will commence on the 14th November, 2009
  • The working group had made other important recommendations as well, which the govt. will likely implement later
  • These recommendations are likely to address the issues faced by the old calculation system
  • Most pertinent being data in-availability of most of the manufactured articles
  • Earlier the WPI was compiled with prices of only 20% of the manufacturing articles, remaining being estimated from these
  • It was for this reason why there was such variance between the provisional data & the revised data
  • Among the more important recommendations of the committee were updating of the Base year from 1993-94 to 2004-05 & expanding the commodity number
  • The current WPI with 435 articles & Base year 1993-94 does not properly capture the current trend in the basket of goods
  • Service goods & items like mobiles which are now important are largely missing
  • An increase in the weightage of the manufactured articles in the WPI  was also recommended
  • These proposals were criticized by RBI sensing that monitory policy would then become difficult to review
  • So for now the Cabinet is only implementing the periodicity change while saying that the other changes will follow soon
  • The govt.’s move may be a first definitive step in correcting the flaws of the WPI but the discrepancy b/w CPI & WPI remains

Kredent ANALYSIS – While the bureaucrats argue that the move is aimed at aligning our inflation reporting frequency with that followed by other major economies, market participants believe that the move is aimed at subduing the hysteria around inflation ahead of it attaining high levels

Author: Rahul Sonthalia, Analyst, Kredent Group

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