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 ministry’s 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
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
UK’s, at 10 per cent, is almost virtually identical to India’s 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.