Measures of inflation
Reserve
Bank governor D Subbarao has said that India needs a new measure of
inflation — the producer price index. According to Subbarao, the most
widely watched measure of inflation in India, the wholesale price index
(WPI), does not include services, which forms a big part of economic activity.
Let’s have a look at all the current inflation measures and their shortcomings
and what the RBI wants:
Wholesale Price Index
The WPI is the most widely watched gauge of prices in India, tracking
commodity prices at the wholesale level. It has three major components: primary
goods, fuel and power index and manufactured goods.
Primary
goods carry a weight of 20.12%, ‘fuel and power’ 14.91% and manufactured
products 64.97%.
1. Not globally comparable as countries either
have a producer price index or a consumer price index that is used by central
banks.
2. Has only goods, and excludes services, a huge
part of the economy, which directly affects prices of all other things.
3. Most of the prices are captured through mandis
or places where wholesale transactions take place. These rates do not reflect
the prices consumers pay for goods.
Consumer Price Index
India currently has four
indices that measure changes in prices of goods and services paid by the final
consumer.
They are:
Consumer Price Index (CPI) for rural labourers, for agricultural labourers and
for industrial workers, and (the latest) all-India consumer price index.
1. The indices for rural labourers, agricultural
labourers and industrial workers are too narrowly targeted to be used for
macro-policy formulation.
2. The all-India CPI, which has been divided
between urban and rural areas, gives the most accurate picture of prices but
has very limited history as it was started in January last year.
Producer Price Index
A producer price index (PPI) tracks the price of goods recorded at
the first transaction. It measures changes in prices received by domestic
producers of goods and services over time.
This is
different from the retail prices, which include shipping costs, taxes and other
levies. It gives an account of the economy’s efficiency in transferring goods
and services from the producer to the consumer, who could be the final consumer
or another producer using it as an input.
The
government is in the process of creating a PPI, besides revising the WPI. The
government plans to come out with both indices initially while moving to the
PPI in time to establish congruity with internationally established standards.
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