India Using "flawed methodology" to Calculate Inflation?

[AgNoStiC MuSliM]

India calculates inflation based on WPI
IFIs keep mum on ‘flawed’ methodology​

Thursday, May 08, 2008
By Mehtab Haider

ISLAMABAD: The International Financial Institutions (IFIs) such as the International Monetary Fund (IMF) and World Bank (WB) are silent spectators over the flawed methodology being used by India to show low inflation, a research paper available with The News reveals.

India calculated its official inflation based on Wholesale Price Index (WPI) rather than CPI based inflation. In Pakistan, 40.3 per cent weightage of the CPI is given to food, whereas, this number drops to 26.9 per cent for India’s WPI.

India calculated its inflation based on WPI and its base year is also 15 years’ old (1993-94), which therefore does not reflect the current consumption pattern of the Indian society.

The usage of WPI for calculating India’s inflation resulted in showing a lower figure.

In FY 2004, the CPI-based food inflation in Pakistan was 6pc while India’s WPI inflation was 5.5pc. In FY 2005, CPI-based food inflation in Pakistan stood at 12.5pc whereas it was 6.5pc in India’s WPI based inflation.

The CPI-based food inflation was 6.9pc in Pakistan, whereas, it was hovering around a mere 4.4pc in India’s WPI.

The CPI based food inflation stood at 10.3pc in FY 2007 in Pakistan while it was 5pc in India.

During July-Jan period of the current fiscal, the CPI based food inflation was 12.5pc whereas it stood at only 4.9pc in India.

Contrary to the normal practice for calculating CPI based inflation as being done in USA, Canada, UK, Japan, Singapore, China and Pakistan, Indian authorities are using WPI based inflation on the pretext of various reasons.

In Pakistan, inflation is measured using the conventional Consumer Price Index (CPI), though other indices such as Wholesale Price Index (WPI) and Sensitive Price Index (SPI) are also released on a regular basis. CPI measures the cost of the given basket of goods and services which the consumers have to pay. Globally also, CPI remains the official barometer of inflation in many countries such as USA, UK, Japan, France, Canada, Singapore and China.

Of course, the constituents of the commodity basket for CPI measurement vary from country to country, as is their consumption pattern.

In most of the countries mentioned above, their economic authorities review the commodity basket of CPI at least every 5 to 6 years or whenever it deserves a review.

Interestingly, India uses the WPI as its main measure of inflation.

The WPI, as its name indicates, is designed to measure the changes in price at the wholesale level of all the commodities.

It is not the price that consumers face in the market. Furthermore, the base year for the WPI in India is 15 years old and does not reflect the current consumption pattern of the Indian society.

The author of the research paper further states that India does have a measure in terms of CPI, but it is not used as the official index at the national level. Their CPI has been divided into four major categories: Consumer Price Index (CPI) for industrial worker (CPI-IW), for agriculture labour (CPI-AL), for rural labour (CPI-RL), and for urban non-manual employees (CPI-NUME) and their base years are as old as 1982, 1986-7, and 1984-05 respectively.

India’s use of the WPI as their official inflation index, with the base year of 1993-4 is very suspicious. Firstly, the price changes in the service sector of India are not duly captured in the WPI, despite this sector forming an essential part of the consumption of everyone in the country. For example, services like health, transportation, telecommunication, education etc are not included in the WPI. Hence, the changes in the costs of acquiring these services are not reflected in the WPI movement, thus, an accurate picture of the state is again not given.

The Indian authorities’ reasons for using the WPI as their primary measure are that it is more frequently released, thus minimising the time lag issues for policy making, and that the use of four different CPI measures is a complicated and timely measure, which cannot be used on a national level.

However, this does not justify them using the WPI, a measure from the production aspect, as their official use to measure price changes that affect the consumers and their spending behaviour.

The IMF is consulting India under its Article-IV consultation but the Breton Wood Institutions (BWI) never bothered to remind India of its responsibility to provide correct estimates of Inflation.
India calculates inflation based on WPI

What do you guys think of the arguments made here?

Especially interested in Indian input, since this is sourced from a Pakistani publication. Is the criticism valid?

 

[solid snake]

I understand economics only in laymans terms, having only ever taken one semester of macroeconmics. But if what this article claims is true, then the Indian government is only hurting itself. No amount of lying can change the ground reality.

This kind of reminds me of the accusations that Shaukat Aziz's government artificially jacked up economic output figures to make the government look good. There were a fair amount of articles in dawn about that.

 

[Flintlock]

Though I have no clue what the article is going on about, I seriously doubt if India is trying to make its figures look good.

The methods adopted, data collection techniques etc. are all very transparent and if IMF or WB has no issues, then I guess its not as important as it is made out to be.

 

[Neo]

The method is indeed flawed as explained in the article. India calculated its inflation based on WPI and its base year is also 15 years’ old (1993-94), which therefore does not reflect the current consumption pattern of the Indian society.

Let me remind you that Indian economy started to take off in the year 1991, GDP and disposable incomes have doubled ever since meaning that we totally have no clue about the current consumption pattern which is essential to calculate CPI based inflation.

Pakistan changed her index (base) from 1989 to 2005 inorder to launch reforms based on factual figuers rather than assumption. Thsi is the best way to grant economic transparency as advised my IMF and WP, most countries change basic index every five year for same reason.

So what we have here is indeed a make believe policy by previous Indian governments to showcase a much wealthier and economically solid India to attract business.

This also means that poverty should be higher than 23% as claimed by GoI.

 

[Logic note]

The Problem in SHifting to CPI from WPI

How India calculates 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.

 

[Logic note]

And the Steps to Rectify it

Consumer price index sees major revamp

Consumer price index sees major revamp
Oineetom Ojah
Posted online: Tuesday , March 04, 2008 at 2319 hrs IST



Font Size
Print
Feedback
Email
Discuss Save & Share Article What’s this?

Digg My Yahoo Fark
del.icio.us Newsvine Reddit
Rate This Article



New Delhi, Mar 4 The ministry of statistics and programme implementation (MoSPI) has undertaken a complete revamp of the consumer price index (CPI) to better calculate the trend of consumer prices. Under the new methodology, the CPI for urban areas will replace the existing consumer price index for urban non-manual employees. The new statistical system may be used to calculate inflation by the middle of the next year.

The CPI—Urban is expected to replace the wholesale price index (WPI). According to MoSPI secretary Pronab Sen, the WPI doesn’t not reflect exact consumer prices. “It is a fact that WPI does not reflect consumer prices. One needs to look at the CPI, which is announced every month, to see price behaviour at the consumer-end”, Sen had said.

The country has a multitude of different indices for industrial workers, rural workers, urban non-manual employees and agricultural workers. Now the government plans to have only two sets of CPI numbers – one for urban workers and the other for rural workers.

“The basic work is done. The data collection methodology is being finalised. For the urban CPI, we will begin data collection by April 2008, but for rural areas, it is a problem, as data is needed from 1,000 villages and we have a shortage of field staff,” Sen told FE.

The CPI (Urban) will be compiled for a year before it is formally adopted, so that there is ‘empirical evidence’ to compare with later numbers. “The key challenge with compiling the CPI is the continuity of manpower. Since the products are so tightly defined, you cannot have people who collect the data, changing all the time,” Sen pointed.

 

[Vinod2070]

The inflation figure for the poor for whom food is the major component of the consumption basket is definitely much higher than the official figures.

It is true for both India and Pakistan I guess as I have read that the food items have recently got very expensive in Pakistan.

Are Pakistan figures closer to reality than India? May be.

Is real poverty in India higher than official levels? Most likely as that official poverty standard is ridiculously low and based on Calorific consumption than on income (I am not sure about Pakistan but I doubt it is much different there).

But I would not wish any Pakistani to remain poor nor would I feel happy if there are some Pakistanis going hungry!

I don't understand what kind of human beings (?) can feel happy to see the misery of others.

 

[AgNoStiC MuSliM]

Vinod:

I don't understand what kind of human beings (?) can feel happy to see the misery of others.

HUH?

Whats that related to?

 

[AgNoStiC MuSliM]

Logic:

I take it from your posts then that the article is correct in criticizing the GoI for using a "flawed" methodology (different from deliberate underreporting or figure fudging), and that some in the GoI recognize this and are attempting to rectify it.

 

[Tiki Tam Tam]

I don't care about all the quasi scientific methodology since they are all flawed.

These are all ''intellectual'' skulduggery!

Gross mismanagement is the reason, as far as I am concerned.

What matters to me is the cost of products and the money I have to buy them.

And I am not happy!

And I don't care what other countries are facing or not facing, since it does nothing to my stomach or feed my family.

 

[indiapakistanfriendship]

I understand economics only in laymans terms, having only ever taken one semester of macroeconmics. But if what this article claims is true, then the Indian government is only hurting itself. No amount of lying can change the ground reality.

This kind of reminds me of the accusations that Shaukat Aziz's government artificially jacked up economic output figures to make the government look good. There were a fair amount of articles in dawn about that.

I am not sure about skewing inflation prices for the sake of looking good. First you need to understand that in India not many understand the concept of inflation in the first place to understand or to appriciate the government. Secon no matter what you project as inflation price rise is something which you cannot hide from the consumers who shall be feeling its pinch so no matter what you do to project inflation value the core isssue of price rise is something that will be felt by many, projected by both media and political outfits, so the notion that India calculated the inflation though WPI rather than CPI to garner puplic opinion is off the mark simply due to the reason that price rise is something you simply cannot hide.

 

[Vinod2070]

Vinod:

HUH?

Whats that related to?

It was related to some guy here lamenting that 300 million Indians are now eating twice instead of once earlier and relating that to India benefiting from 9-11!

Think of muddled thinking!

 

[Bushroda]

Logic:

I take it from your posts then that the article is correct in criticizing the GoI for using a "flawed" methodology (different from deliberate underreporting or figure fudging), and that some in the GoI recognize this and are attempting to rectify it.

The author has overlooked the important reason for the WPI based inflation calculation. Pakistan, US, UK, Canada, Singapore, China of all the countries that he has mentioned unlike India none of them have a public distribution scheme not to mention other hell lot of subsidies provided by the government. WPI based calculation allows government to regulate the food prices where the minimum purchase rate of food grain is fixed before it reaches the consumer market. 75% of Indian population is dependent on government PDS for its food consumption needs where they are provided food grains, kerosene & essential commodities at nearly 30% - 40% of the actual market price & any increase in cost of essential commodities would cause similar food crisis in India as its happening in several other countries. For India to move from WPI to CPI based index it would most likely need to withdraw subsidies to the consumer including food, electricity etc as I don't see how they regulate the prices of essential commodities at the consumer level. GoI is unlikely to withdraw subsidies anytime soon maybe not even in next 20-25 years. But in order to accomodate its middle income & higher income group some kind of hybrid calculation method can be adopted.

 

[Goodperson]

It was related to some guy here lamenting that 300 million Indians are now eating twice instead of once earlier and relating that to India benefiting from 9-11!

Think of muddled thinking!

Good one !!! Trying to hit two birds with one stone

 

[AgNoStiC MuSliM]

The author has overlooked the important reason for the WPI based inflation calculation. Pakistan, US, UK, Canada, Singapore, China of all the countries that he has mentioned unlike India none of them have a public distribution scheme not to mention other hell lot of subsidies provided by the government. WPI based calculation allows government to regulate the food prices where the minimum purchase rate of food grain is fixed before it reaches the consumer market. 75% of Indian population is dependent on government PDS for its food consumption needs where they are provided food grains, kerosene & essential commodities at nearly 30% - 40% of the actual market price & any increase in cost of essential commodities would cause similar food crisis in India as its happening in several other countries. For India to move from WPI to CPI based index it would most likely need to withdraw subsidies to the consumer including food, electricity etc as I don't see how they regulate the prices of essential commodities at the consumer level. GoI is unlikely to withdraw subsidies anytime soon maybe not even in next 20-25 years. But in order to accomodate its middle income & higher income group some kind of hybrid calculation method can be adopted.

I understand what you are saying, but your post also indicates that the argument made in the article is valid, in that the context of the article is a comparison of inflation stats between various countries, and that such a comparison statistically at least cannot be made due to the methodology used by India.

Add to that the PDS and related subsidies (not necessarily a bad policy when it comes to basic/essential commodities) tend to artificially lower Indian inflation, than would be possible in a "free market".

Would the above be a correct interpretation of your argument?