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BW Businessworld

Unmeasured Inflation

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It should be made more rational, comprehensive and faster as inflation gathers strength, it is coming to occupy an increasing proportion of media space. There is only so much that can be said about a puny figure that comes out only once a week (there are actually a few hundred price indices that the office of the economic adviser to the industry ministry puts out every week; but his website is so badly designed, and makes looking up an individual index such pain, that no one looks at them). So a hunt is on for fresh angles.

One of them concerns the accuracy of the wholesale price index. The learned economic adviser does not receive prices every week for many of the commodities he has included in the wholesale price index. When he lacks a price quotation, he repeats the figure for the previous week; if he does not have that one either, he repeats the figure for the preceding week, and so on. So it is possible that the figure that goes into the index is weeks, months or even years out of date. And at a time when most prices are rising, an old figure is a figure that does not reflect the price rise and therefore underestimates it. Missing prices are unavoidable, but the economic adviser’s practice is not the best that could be imagined.

An obvious improvement would be if, instead of assuming that the prices whose current quotations are unavailable have not gone up at all, it was assumed that they went up in the same proportion as the average of available prices. The change could make a substantial difference. If, to take a conservative figure, one-seventh of the current prices are missing, inflation of 7 per cent as measured under the current practice would be 8 per cent under the improved practice. It could not exceed twice the recorded rate; it could be that high only if all prices but one were missing. But a measured rate of 7 per cent could easily be 9-10 per cent under the proposed practice. And that would seem to be the most likely reason why the esteemed economic adviser has not adopted the improved practice. If, for some reason, he does not like it, he can do the next best thing, and publish the proportion of missing prices; then his readers can draw their own conclusions.

There is a more fundamental issue, namely, whether the government should try to measure wholesale prices at all. They belong to a world where there were big markets for bulk commodities. The world was like that some centuries ago perhaps — traders bought peas or peanuts from farmers and carted them to a mandi for bulk trading. But most commodities are no longer traded that way. They are produced by manufacturers and delivered to shops for direct purchase by consumers. There are no wholesale prices for such products; there is a consumers’ price, and a producers’ price. The wholesale price index needs to be replaced by a producers’ price index.

It also makes no sense to confine an index to tangible commodities in an economy where more than half the output consists of services. Services are consumed at the same moment as they are produced, so normally their consumers’ price would be the same as the producers’ price. But that is not necessarily the case. Electricity, for instance, is sold in bulk by its primary producers to distributors. This is common in countries with free markets, but even in a pseudo-socialist country like ours, it is not unknown. A number of states have privatised electricity distribution; they do therefore have distinguishable producers’ and consumers’ prices. A similar distinction can be made, for instance, between wholesale and retail interest rates. The government should get away from what might be called the fallacy of misplaced concreteness, and construct a wholesale price index that includes services.

And it should do so faster than it is used to. Currently, it revises an index maybe once in a decade. For the purpose, it appoints a committee of moribund minor bureaucrats from all over the country. They meet once in a few months — at any rate the few who can bestir themselves to attend the meeting. They deliberate for years, and finally draft a report. The government sits on it for some time longer, and finally introduces a revised index which is some years out of date on its very first day. Surely there must be a quicker way. One possibility would be to ask producers’ associations to produce indices for their own commodity groups; for instance, bankers could no doubt produce a better interest index faster than the government’s own financial bureaucrats could. In these days of public-private partnerships, statistical information offers an appropriate field for their application.
(Businessworld issue 29 April-5 May)