The Hindu Business Line : Monthly check-up for inflation

Weekly Wholesale Price Index numbers give a feel of economic dynamics with a shorter lag. Until a system is in place to generate WPI data to help in monetary policy formulation, it would be inadvisable to discontinue its weekly compilation, says K. KANAGASABATHY.

The Government yesterday switched to monthly release of wholesale price index (WPI) inflation data from its age-old weekly format. Henceforth the weekly WPI data would cover only primary articles and commodities in the broad group of fuel, power, light and lubricants.

The Government cites three major reasons for this change: to align with global practices; to accurately capture the changes in prices of manufactured goods where the response rate is poor; and to avert market volatility resulting from the present system.

The weekly WPI will continue to be computed but will not be made available to the public. Does a similar practice exist elsewhere in the world? If the weekly data is provided to the RBI or the Ministry of Finance, will they, in turn, have the right to share that information with the public?

On the other hand, if the weekly data is not used at all then why collect it , especially when it can save some administrative cost? In the interest of transparency, the new framework for compilation of weekly data and its dissemination practices, weekly or monthly, should be disclosed to the public.

A true measure?

There are several reasons for questioning the merits and rationale for changing the release calendar of WPI data. In the context of global practices, the debate aroundthe WPI is not with regard to its frequency but its credibility as a true measure of inflation. The global practice is to measure inflation in terms of a representative consumer price index (CPI). In India, there are three different measures of CPI, namely, for industrial workers, for urban non-manual employees and for agricultural labourers; none of these can be considered as wholly representative. It has long been suggested that the country should evolve a representative CPI, like other countries, and abandon WPI as a measure of inflation for policy purposes.

While this is prima facie acceptable, it should also be recognised that historically the weekly WPI had served the purpose well, particularly because of its larger coverage (except services), and its frequency. The RBI has also traditionally relied heavily on the WPI as a measure of inflation (although no inflation targeting is in vogue).

Most studies on inflation and its relationship with output, money and measures of income have relied on WPI. While there is merit in calls for a representative CPI, it however does not mean that India should give up its unique practice of weekly WPI.

After all, inflation is measured to quantify the increase in the general price level in a country, and not with reference to any particular commodity or specific groups. Inflation also indicates the change in the purchasing power of the domestic currency or debasement in currency value. Towards this end, the WPI has served well.

If we take the different price indices generated in India and calculate the worth of Indian rupee over a long period, as at end 2008-09, the rupee has debased to one third of its value vis-À-vis 1971-72. The actual value ranged between 31 paise and 35 paise, depending upon the index used, which is not a wide range at all.

On the other hand, a general index and the sectoral or group indices help determine the sources of inflation — whether it is demand or supply driven and which particular group of people is affected and vulnerable to price increases. The accompanying table shows that in the past decade, agricultural labourers and industrial workers were hard hit by inflation compared to the previous decade.

Multiple indicators

From policy perspective, the numerous inflation indicators, as in India, should prove beneficial rather than a bane. Similarly, the high frequency of WPI data, whether by design or default, should be welcomed as a luxury available to policymakers rather than seen as suboptimal to global practices.

The report of the RBI’s Committee on Financial Sector Assessment (chaired by Dr Rakesh Mohan) acknowledges its utility too. The weekly WPI has acquired considerable significance over time, as it alone indicates week-to-week fluctuations in prices of all traded commodities. It has stood the test of time since 1942. The high frequency of WPI makes it superior to the CPI-IW. Second, the WPI’s coverage of commodities is high. While it does not cover services, its coverage of non-agricultural products is better than the CPI, making it less volatile to relative price changes. The RBI has rightly opined that the WPI frequency should remain weekly and not changed to monthly.

Dr Mohan has argued that in India, data that could serve as lead indicators — such as unemployment rate, labour productivity, capacity utilisation, inflation expectations, and housing prices and volumes — are not available.

The weekly WPI gives a feel of the economic dynamics with a shorter lag. Until a system is in place to generate the above-mentioned data to help in monetary policy formulation, it would be inadvisable to discontinue the weekly compilation of WPI.

Checking market volatility

Both in theory and empirics, the accepted notion is that information availability reduces volatility. New information no doubt drives modern financial markets. It does not mean that information should be withheld to improve market efficiency. Even in the absence of weekly information, market participants will speculate on price movements and thereby create more volatility. Therefore, it is strange to argue that weekly supply of price information is a source of volatility.

If the response rate for weekly price information is found wanting, then it is a failure of monitoring and follow-up. How can one conclude that monthly information will improve matters? The solution to poor data response is not delayed data release, but timely data supply.

Overall, the WPI information was available with a two-week lag. Now, the information for a month is expected by the second or third week of the subsequent month. Thus, the lag will be six weeks. This is not an improvement at all.

(The author is Director, EPW Research Foundation. These are his personal views.)

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