Inflation in India 2009
India has been the cynosure for the past few years in the global economic arena owing to its changing inflation patterns. Between the fiscal year 2004-05 and 2007-2008, India had experienced an average growth rate of more than 9%, but the global crunch pinched the economy so hard that the economy gave in to the adverse external shocks and few sectors experienced a slump. Inflation in India 2009 stands at 11.49% Y-o-Y. The inflation rate is referred to the general rise in prices, taking into consideration the common man's purchasing power. Inflation is mostly measured in CPI.
In 2008 industry bodies, policy makers were all worried with the steadily-mounting inflation. The middle of the year augmented the tension as the majority of the population was wary of a double-digit inflation but things changed within few months. Inflation in India actually fell below 1% during the third week of March, 2009. The moderate inflation is the desirable of all too much of it or too less of it, in every way worries the policy makers.
Understanding in the right manner inflation is such a situation when too many people chase too few goods and too few services, which automatically makes the prices of the goods and services high because of the high demand. At the same time, when inflation falls below the desired mark (in the negative territory), then too few people chase too many goods and too many services, making the prices of the goods and services under-priced.
The India inflation is actually measured by the Y-o-Y variation in the Wholesale Price Index. While the inflation as measured by WPI is at present at a very low level, the inflation measured by the Consumer Price Index is at elevated levels of 9 to 10%.
Inflation in India statistics
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| 2009 | 10.45 | 9.63 | 8.03 | 8.70 | 8.63 | 9.29 | 11.89 | 11.72 | 11.64 | 11.49 | - | - |
| 2008 | 5.51 | 5.47 | 7.87 | 7.81 | 7.75 | 7.69 | 8.33 | 9.02 | 9.77 | 10.45 | 10.45 | 9.70 |
| 2007 | 6.72 | 7.56 | 6.72 | 6.67 | 6.61 | 5.69 | 6.45 | 7.26 | 6.40 | 5.51 | 5.51 | 5.51 |
| 2006 | 4.39 | 5.31 | 5.31 | 5.26 | 6.14 | 7.89 | 6.90 | 5.98 | 6.84 | 7.63 | 6.72 | 6.72 |
How India calculates inflation
Rising inflation was the most recent ticklish political issue that hit the Manmohan Singh'erroneous method' of calculating inflation? government. But was inflation rising because of price rise in essential commodities?
Some economists assert that India's method of calculating inflation is wrong as there are serious flaws in the methodologies used by the government.
Economists V Shunmugam and D G Prasad working with India's largest commodity bourse -- the Multi Commodity Exchange -- have come out with a research paper arguing that the government urgently needs to shift the method of calculating inflation.
Saying that there are serious flaws in the present method of calculating inflation, the paper India should adopt methodologies in developed economies.
So how does India calculate inflation? And how is it calculated in developed countries?
- India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
- Most developed countries use the Consumer Price Index (CPI) to calculate inflation.
Wholesale Price Index (WPI)
WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.
WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.
Consumer Price Index (CPI)
CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
\CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.
Economists Shunmugam and Prasad say it is high time that India abandoned WPI and adopted CPI to calculate inflation.
India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for.
"CPI is the official barometer of inflation in many countries such as the United States, the United Kingdom, Japan , France , Canada , Singapore and China. The governments there review the commodity basket of CPI every 4-5 years to factor in changes in consumption pattern," says their research paper.
It pointed out that WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level.
The paper says the main problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view.
Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.
India constituted the last WPI series of commodities in 1993-94; but has not updated it till now that economists argue the Index has lost relevance and can not be the barometer to calculate inflation.
Shunmugam says WPI is supposed to measure impact of prices on business. "But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index. And it does not factor in services which have assumed so much importance in the economy," he pointed out.
But why is India not switching over to the CPI method of calculating inflation?
Finance ministry officials point out that there are many intricate problems from shifting from WPI to CPI model.
First of all, they say, in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual Employees; CPI Agricultural labourers; and CPI Rural labour.
Secondly, officials say the CPI cannot be used in India because there is too much of a lag in reporting CPI numbers. In fact, as of May 21, the latest CPI number reported is for March 2006.
The WPI is published on a weekly basis and the CPI, on a monthly basis.
And in India, inflation is calculated on a weekly basis.
NEW DELHI: Amid concern over spiraling inflation, due mainly to galloping food prices, India Friday projected a 7.75 percent growth for this fiscal even as the world at large is still struggling to overcome the year-long slowdown.
"The remarkable turnaround of the Indian economy has been widely commented upon in India and internationally," said the mid-year fiscal review for 2009-10, tabled in parliament by Finance Minister Pranab Mukherjee.
"With the growth in real gross domestic product at 7.9 percent in second quarter and its broad-based nature, the clouds of uncertainty have lifted," said the 126-page review, listing the economic achievements so far and the challenges ahead.
"The growth outlook for the next two quarters and for the whole year is likely to be in the upper bound of the range predicted and may even exceed it," said the review, while recalling the finance ministry's best-case prediction of 7.75 percent in July.
The review also lists the government's concerns and high on that list is rising prices, notably in such items of everyday consumption like potatoes, onions, cereals and pulses, that has seen the country's annual food inflation balloon nearly 20 percent.
"The rise in the prices of primary articles of consumption of the common man that has been occurring in recent times is, indeed, a cause of concern. This needs to be attended on an urgent basis," it says.
"The short-run pressure on food prices are likely to persist because of the weak monsoon which has affected the kharif (summer crop) production of food grains."
The other areas of concern expressed by the review include:
-High fiscal deficit due to steps taken to counter the global slowdown.
-Negative impact of capital inflows on rupee valuation and export competitiveness.
-Stagnation in farm output since 1990s after reaching the fruits of Green Revolution.
-Poor extension of infrastructure services to farmers.
-Lukewarm in growth of credit, especially to industry.
-The dilemma of the central bank in balancing between growth and inflation.
The review, nevertheless, says the government and the central bank have not only taken timely steps to contain the fallout of global slowdown on the Indian economy but the measures have also worked.
"There is enough evidence to suggest that the fiscal policy measures undertaken by the government have worked. There is need to observe the growth in major components for a couple of quarters to confirm the self-sustaining nature of this recovery."
