16 Nov 09 The cost of (not having) a price index
Inflation is a key parameter all central banks are required to manage. The price index enables them to measure inflation. For years, the RBI has been operating without a robust measure of inflation – shooting in the dark.
The irrelevance of the current price indices in India was starkly highlighted in recent months when the inflation rate as measured by the WPI (wholesale price index) continued to remain close to zero, while people saw prices of food grains, pulses and vegetables go through the roof.
India is one of the few countries (may in fact be the only one?) where the inflation rate is calculated using wholesale prices – in most countries a consumer price index is used. India has 4 different consumer price indices for – agricultural workers, rural labourers, urban non-manual employees and urban industrial workers – which means there is no single measure that can be used. And for many years now, the baskets of commodities used for the consumer price indices have been irrelevant. The need for a new index is being (only) discussed for over 5 years.
We finally have a new WPI now – a more accurate one that will be updated every month rather than every week. A new CPI is also on the way, though there are reports that it is going to be delayed beyond the originally announced schedule. The new CPI will have separate indices for urban and rural India but also a single composite one. When the CPI is eventually launched, if it well designed, it will obviate the need for a WPI as a policy tool.
In the last 20- 25 years, policy makers as well as business analysts world-over have increasingly come to rely on quantitative/statistical estimation techniques to do predictive modelling. Economists and bankers use elaborate models for economic forecasting. Companies use consumption, income and demographic data for predictive modelling. Analysts in India are handicapped by a lack of fodder for these models. The RBI needs more accurate data inputs to manage macro variables in an increasingly complex environment – as does the corporate sector.
In all fairness, most developing countries suffer from under-documentation. And India does not fare very much worse than most other countries with similar income levels. Nevertheless, given that it is now among the fastest growing ones, and hopes to move up the ladder at an accelerated pace, its time for the statistical departments (including the CSO) to keep up with the needs of the economy.