India "DEFLATED"??? - Inflation என்றால் என்ன?

India’s inflation as on June 6^th is –1.6%. Now does that mean everything is damn cheap and the demand has reduced? Are we in a deflationary economy? Read on,

Here are the prices of the vegetables in Chennai’s wholesale market on May 27th and June 8th. These prices indicate only one thing; the inflation calculation is nothing but a serious joke.

To know why this –1.6% is a ridiculous number, let us see how inflation is calculated in India. Basically, there are two types of Price Indices that are used to calculate inflation in countries around the world; they are WPI and CPI

• Whole Sale Price Index (WPI): WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. Which means that the actual cost to the consumer is not captured here. This index is available in a weekly basis, with the shortest possible time lag of two weeks. That is why the inflation data for 6th June is published on 18th June. India is the only major country that is using WPI to calculate inflation.
• Consumer Price Index (CPI): CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. Which means that, the actual cost to the consumer is captured. But since it is a time-series measure, inflation can be calculated only on a monthly basis. Most developed countries use this CPI to calculate inflation.

India has a basket of around 435 items to calculate the WPI. The basket consists of items of 3 major groups: Primary Articles (98), Fuel & Power (19) and Manufactured goods (318). The three major groups of the commodity basket are divided into various subgroups.Primary Articles are divided into 3 sub-groups consisting of (i) Food Articles,(ii) Non-Food-Articles and (iii) Minerals. The Group of Fuel and Power is divided into 3 sub-groups; (i) Coal, (ii) Mineral Oils and (iii) Electricity. Manufactured Products are divided into 12 sub-groups; (i) Food Products, (ii) Beverages &Tobacco, (iii) Textiles, (iv) Leather & Leather Products, (v) Wood & Wood Products,(vi) Paper & Paper Products, (vii) Chemicals, (viii) Rubber & Plastic Products, (ix)Non-Metallic Minerals, (x) Basic Metals & Products, (xi) Machinery & Machine Tools,and (xii) Transport Equipment & Parts.

Ok, we have got the basics now lets go to the rubbish i.e. lets calculate the inflation

Calculation of WPI: Lets calculate the WPI of say tomato. Calculating WPI needs a base number and a base price. Let those be 100 and 10 Rs respectively. Now on May 27th the price of tomato is 20 Rs and on June 8th it is 16 Rs.

Since WPI base no is 100 the WPI Index on May 27th and June 8th is 200, 160 respectively.

Similarly WPI is calculated for remaining 434 items and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weights depending upon its influence in the economy.

Calculation of Inflation: Now we know the WPI of tomato on June 8th and May 27th

Similarly it is calculated for other commodities and a consolidated figure is obtained. Now tell me, what is the better word to describe this procedure, ridiculous, stupid or humbug?

The method is flawed because:

• It does not take into account the actual cost to consumer
• Most of the included commodities are meaningless from the point of view of a lay man
• The WPI is based on commodities included in 1993-94 and.... you know what :P

So what does –1.6% mean, as told earlier, it means nothing. This percentage is because of what is called the “base effect”.

An ordinary man like you and me, cares not about the inflation percentage, but for the money we pay out of our pocket for getting essential commodities. On that note, India is a big inflationary economy. With 60% of the population not able to make ends meet with the prevailing prices of essential commodities, you will see the economists, politicians and news channels debating on this meaningless –1.6%.

That’s our India for you!! Mera Bharat Mahan!!