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Wholesale Price Index flawed, says Economic

Adviser Virmani

The Indian government uses the weekly WPI as the key indicator

of inflation in the domestic economy and does not have an

aggregate consumer price index (CPI) to monitor inflation. India

is perhaps the only major country to do so

New Delhi: Comparing India's WPI-based inflation figures with global consumer price

inflation numbers masks higher wholesale prices overseas.

In a forceful reminder of the follies of comparing Indian wholesale price index (WPI)-based inflation with global consumer price inflation numbers, the finance ministrys Chief

Economic Adviser Arvind Virmani has said this masks the fact that wholesale prices are

higher overseas than here.

People look at global consumer prices, let us say for the United States, the European

Union or the United Kingdom, which are rising in the range of 3-5 per cent, as always.

Though they have increased substantially, the numbers still look very small when you

compare it with our WPI (at 12.01 per cent for the week ended July 26). That is a

fundamental mistake and highly misleading, Virmani said in an interview with Business

Standard last week.

The Indian government uses the weekly WPI as the key indicator of inflation in the

domestic economy and does not have an aggregate consumer price index (CPI) to

monitor inflation. India is perhaps the only major country to do so.

Several economists say this is wrong and have called on the government to change the

system, especially as we have four different CPI indicators, data for some of which come

with considerable lag.

So, developing on a thesis that he first started this March, Virmani compared the

Producers Price Index (PPI) data of the United States and the United Kingdom with the

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Indian WPI.

I did this and saw an incredible thing. The inflation rate as measured by the PPI is higher

(at nearly 16 per cent) than that of India in June, despite the sharp rise in the latter, he

says.

Since the UK does not have an aggregate PPI, but only for manufacturing, Virmani, who

presented these findings at a recent seminar, then decided to compare it with the US PPI

for industry (which does not include manufacturing, but has industry) and the Indian WPI

for manufacturing.

Once again, we found the same thing. The US PPI for industry is much higher and the

UKs, at 10 per cent, is almost virtually identical to Indias in the last five to six months,

he added. Virmani says this proves his thesis that the global commodity price hike has

provided the real impulse to the recent inflationary trend in India.

To buttress this, he points out that the acceleration in inflation during the first half of

2008 is estimated at 9.9 per cent, as compared with 2.7 per cent in the same period last

year. Of the 7.2 per cent increase in inflation this year, nearly two-thirds was due to

three sets of commodities edible oils, iron and steel, and mineral oil and refinery

products.

That is quite amazing. I doubt if this has ever happened. The link is very clear. The

impetus for this change came from what one might call the global push factor. That is

one thing which is extremely important, Virmani said.