Postmen emerge key to fiscal policy

Global investors may well be putting their faith in postmen like Phanin Deka when they decide to buy or sell Indian assets in the future.

He is one of about a thousand post workers collecting data that determines the level of India's consumer price index, which is likely to become the central bank's most important tool for setting monetary policy.

Deka, a postmaster in Sarpara in Assam, spends 6 days every month visiting two villages by bicycle to collect prices from 15 shops. “t times, some shopkeepers refuse to co-operate. I think they consider me as an irritant, particularly when customers are around,”  Deka said.

Recently, a committee formed by Reserve Bank of India (RBI) Governor Raghuram Rajan proposed making CPI the central bank's main inflation measure and using it to set an inflation target, part of sweeping proposals to revamp monetary policy in a country that has long struggled with high inflation.

It would make CPI the most important data followed by the central bank and key in determining changes in interest rates that could affect millions of dollars in investments and loans. Recently, the RBI unexpectedly raised its policy interest rate by 25 basis points to 8 per cent, citing its intent to bring consumer inflation down in line with the path spelled out by the panel, an indication it will adopt those recommendations.

There is a wide gap between wholesale and consumer inflation in India, so if the new set up is approved, economists expect higher interest rates for longer. In December, WPI inflation in Asia's third-largest economy was 6.16 per cent and CPI was nearly 10 per cent.

Using CPI as a benchmark eventually to bring inflation down to a targeted 4 per  cent, plus or minus 2 per cent, would better reflect the way inflation affects the broader population, the committee argued.

However, the current CPI inflation series was launched only in 2012 and is based on nearly decade-old consumption patterns in a country of 1.25 billion people whose spending habits are changing fast. Average incomes have more than doubled over the same period.

Power failures, worker strikes that shut shops and businesses, heavy rains and flooding, and even insurgencies all make the postal workers' data collection more difficult. That leads to some guess work.

“Sometimes during the rainy season, I am unable to go out. Then I have no option but to fill in the prices of different items myself," said a postman in Guwahati in northeastern India, who declined to be identified.

“Usually I go to shops once or twice in two or three months to check price trends and fill in the price details myself by cross-checking with my wife,” he said.

Arvind Mayaram, economic affairs secretary at the ministry of finance, acknowledged there are shortfalls in the consumer price index. “CPI has a lot of imperfections,” he told a TV channel recently. “We know that it requires a whole lot of sophistication, which we haven't achieved yet on determining CPI.”

Houses and milk 

Consumption patterns between rural and urban India differ dramatically, and there is no data available on rural housing costs. Food consumption, the key driver of persistent consumer price inflation, is changing as incomes grow steadily, especially in rural areas. 

Food is now about 50 per cent of the index, the highest among the BRICS nations of Brazil, Russia, India, China and South Africa. That weighting will be brought down in a new CPI series,  T C A Anant said, India's chief statistician. Clothing, now just under 5 per cent of the basket, would also change, he said.

"There has been a decline in the share of food in the total expenditure, and within food there is shift from cereals to protein, eggs, milk and other items that need to be reflected in the index," he added. 

Food is a major source of inflation —  about a third of fresh produce perishes before it reaches the shops — and is currently running at double digits.
Challenge 

The postal service started in 2011 to collect price data for the Statistics Department. Collecting quality information on roughly 300 index items is a challenge in such a large country, and some officials privately expressed doubt over the quality of price data collected by the postmen in village markets.

“ A postman who cannot even timely deliver letters, you expect him to gather price data on hundreds of items?” a senior official at the statistics department said. “Half of the month here businesses remain shut due to strikes called by various organisations or there are other problems related to militancy,” another postman, requesting anonymity, said.

Pronab Sen, head of the National Statistical Commission and Anant's predecessor as India's chief statistician, said that until the CPI index builds long-term data, the central bank should use both the CPI and WPI to set monetary policy.