The TV anchor was caught unaware. “You mean the inflation figures that the government presents are not based on a reality check? Are you saying that the formula for calculating inflation is faulty?” he asked, visibly surprised.
“Yes”, I replied. “The inflation figures are based on wholesale prices and not the retail prices. For an average consumer, the wholesale price index (WPI) has no meaning. What impacts him or her are the retail prices.” The TV anchor didn’t give up. He seemed keen to decipher the methodology of measuring inflation.
Not only the media, I realise that by and large the nation has no idea as to what constitutes inflation. They diligently follow the inflation figures that are tossed around in the newspapers. But what baffles them is that their monthly expenditure has not gone down despite the government’s claim that inflation is on a downward course. And yet they accept the official statistics and refuse to question the official claims simply because they don’t want to make their ignorance public.
From a high of 6.5 per cent, inflation has now come down to 3.5 per cent. These figures obviously bring relief for Finance Minister P Chidambaram. He has been under tremendous political pressure for the resulting “overheating” of the economy. But does it mean anything for the average consumer? And more importantly, has the fall in inflation helped ease the pressure for a housewife who manages the monthly household expenditure?
For a housewife or for that matter the average consumer what matters most is the monthly bill. Whether it is by way of expenses incurred on food, housing, clothing or for health, education and travel there is no respite. Prices are on an upswing. Take the expenditure on food items. When general inflation is being pegged at 3.5 per cent, the food prices index is almost touching 8.5 per cent. Prices of the most common items in the food basket – wheat, rice, pulses, onion, potato, brinjal, tomato and milk – are on an upward spiral clocking a rise between 6.5 per cent for potato to 91 per cent for onions.
Even the Consumer Price Index (CPI), which is actually worked for different categories of population like rural, agricultural workers, industrial labourers, urban service class, too floats around 7 per cent. With both the food prices index and the CPI remaining abnormally high at a time when inflation is being projected to have come down significantly, I am at a loss to understand as to what kind of inflation are we talking about? Who are we trying to hoodwink by presenting a data that has little relevance to the ground realities?
Economists tell us that CPI includes adequate weightage for food, fuel, clothing, transport, communication, medical care, entertainment, housing, education, and other such items, which directly impact the consumer. For a nation where the basic necessities hover around roti, kapda aur makaan what surprises me is that the WPI (or for that matter CPI) does not give adequate weightage to any of the three components. Although food items constitutes 33 per cent of the WPI but what is still not clear is how much importance is given to clothing and housing. If the WPI actually reflected on the housing cost, for instance, I see no reason why inflation should not have blasted through the roof in the past three years.
Real estate prices have zoomed and it is now practically impossible for an average citizen to even think of buying a modest house in any of the towns and cities. Why the housing cost is not reflected in the inflation index is something that needs to be questioned.
Ask an arhtiya or a wholesaler when was the last time he sold any commodity at a price that was less than the prevailing retail market price. I am sure he would laugh at you for the stupid question. And yet, between 2002-04 consumer price index remained lower than the wholesale price index. Economists say this was because the rise in prices of iron and steel, iron ore, aluminium and other metals was not passed on by the industries to the consumers. In other words, the industries that use these as raw material preferred to take the additional burden on themselves.
Amazing, isn't it? Since when have the industries learnt to bear losses to stay competitive? Much of what goes into WPI and CPI would defy common sense. But then economics and common sense have not been known to go together.
As per the Centre for Monitoring the Indian Economy (CMIE) the CPI for agricultural labourers was 1.21 per cent in June 2004, and for industrial workers it hovered around 3 per cent. This was much lower than the WPI-based inflation of 7 per cent in August 2004. For a layman on the street, this is simply not possible. How can wholsale prices for any commodity be ruling higher than the retail prices? If this is true isn’t it time to have a re-look at the system of computing both the WPI and the CPI? Isn’t it time to actually overhaul the inflation methodology knowing that it is not based on common sense?
