Imperfect index

The wholesale price index (WPI) with 2004-05 as the base year, released by the government this week, is an improvement on the existing one with 1993-94 as the base year, but is still not the best tool to measure inflation.

The new index is more representative as it includes many more items of consumption than the old one did. As an indicator of consumption patterns which have changed drastically in the past many years it is a step forward but it does not capture the spending levels and the costs incurred by consumers over a wide range.

The number of commodities included in the index has been increased by more than half to 676, after dropping many items which are not in common use now and including others which are part of the current consumption basket. It gives the index a middle class slant, reflecting the spending power of that rising class, but fails to encompass the majority of people.

The WPI however is now more indicative of the composition of the GDP, as the weight of primary commodities will be less. The manufactured goods now have a more important place in the GDP than 15 years ago and therefore the index can track their price movements better. But the biggest lacuna in the new index is that it does not include services, like educational and health expenditure.

The services sector has expanded phenomenally and the cost of services has also increased. There was a proposal to develop a separate index for the services and integrate it with the WPI. But this has not been done. An index that does not cover the services will not correctly reflect the consumption patterns of the people.

There are methodological and structural problems too. The prices that go into the making of the index are sometimes wholesale prices and sometimes retail prices. Even minimum support prices are included. This distorts the nature of the index. The correctness of the data collected for the index is sometimes in doubt as the methods are often unreliable.

This affects the integrity of the index and detracts from its value as a faithful indicator of the cost of living of an average household. While inflation in India is among the highest in the world, the new series does not reflect that. It needs to be perfected further.

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