If you did not knew, India is possibly the only significant country in the world which uses WPI (wholesale price index) instead of CPI (consumer price index) to calculate inflation. And this is the reason why inflation figures do not have much relevance for a common man.
Let me first explain what are the individual constituents of WPI.
1) Inflation to me is the yoy increase in cost of living to maintain a certain lifestyle. Now if you closely observe, you would notice that housing, entertainment, education, and other services do not figure anywhere in the government figures… even though they constitute a significant part of our expenditure.
2) All the prices used for computing the inflation is wholesale prices. Now how often do we go to the wholesale mandi and buy goods at wholesale prices? Retail prices makes more sense.
3) India is a service based economy. Even though we spend a lot on services, they form no part of the inflation figures.
4) Changing basket of consumption: According to MCX Chief Economist V Shanmugam, of the 435 commodities included in the WPI, of which over 100 have ceased to be important from the consumption point of view. Yet no steps have been taken to rectify this. Every country revises their basket of commodities and services every 3-4 years, but india refuses to do so.
5) Administered prices: All these fallacies give room for the government to artificially administer prices and give us the illusion that inflation is low.
If you do not believe me, then do a simple computation. Dig your old bank statements/ledgers/accounts and find out what you spend every month a few years ago. Now compute (on today’s prices) how much will you spend every month to maintain the same lifestyle. I can bet you that the increase in expenditure would be a few times higher than the official inflation figure of 6%.
14 replies on “India’s WPI”
I say bloody brilliant, eh? That’s the reason I keep telling people not to go by the official inflation figures. Thank you for doing this post and hopefully, some other people who weren’t aware will read this post.
Just for the record, CPI is a very good indicator, but it over-estimates inflation by about 1%. It’s used in the US. Most of the times, the CPI estimates need to be adjusted downward by about 1%.
Another very common misconception is that the appreciation/depreciation of a currency depends only upon the (X-M) component (import minus export) of the Balance of Accounts. It depends upon a lot of other things, for example, the current account and the capital (investment) account. I’ll probably do a post on this stuff because it irks me to no end when people talk foolishly.
How does CPI overestimates the figures?
//Another very common misconception is that the appreciation/depreciation of a currency depends only upon the (X-M) component (import minus export)//
very true india gets many times more forex through remittances and FDI then through exports/imports.
I also agree that government makes a mockery of the statistics and the people r often too dumb to notice…. i will wait for your sequel on this topic.
The CPI is based on a basket of goods and services in the base year, whatever it may be. This basket of goods and services will change in the current year because of the rise of complement goods, substitute goods, improvement in the quality of goods and services etc. But the base year’s basket doesn’t change, right? 🙂 Hence, the over-estimation. We need to shift the prediction down by a point because consumers will substitute one brand for another brand which might be better and cheaper.
so the overextimation is because the basket of goods/services for CPI change faster that it does for WPI.
I don’t know if it changes “faster” or not. I presume that the formula used for the calculation of inflation based on WPI is similar to CPI, except for the basket of goods and services.
thats why I am asking why is there this 1% correction…
I know that there is no 1% correction in WPI… the basket is decided for the base year and after some years, they come up with the new basket… but till the basket is not modified…
a similar thing happen for sensex, or any market index….. although they periodically change the basket of the shares and their weightage… it does not happen very frequently.
damn u posted before me
i was goin to do something on these lines
ila had recently done a rather interesting writeup on this !
@Ankur, In the case of CPI, the base basket is not modified, like it’s done in WPI. So if the base yr is 1945, then it will never change. That’s the reason the inflation is over-estimated because the acc. to CPI, the inflation might be 5%, but the real inflation might be only 4% if you take into account the change in the consumer taste, new substitute products that might be of better quality..etc.
wpi is a reality and it is a lot easier for the govt to use it as official statistic as it is easier to tinker with price administration/control at the wholesale end rather than retail which wd be impossible. Not only that the smart figure juggling fm has changed the base yr for inflation calculation to give the rosy picture inflation figure below 4% or the inflation would be a lot higher.
real inflation is a lot higher and in double digits
most vegitable prices have more than doubled in mumbai in 3yrs so have the prices of cereals (up atleast 50%)wheat up at least 20% and rent and electricity dont talk about other stuff !
this figure is mainly for consumption of fiis
but what one has to look at is also the percentage of fiscal deficit which is a good indicator of how the govt is running the show.
=) First movers advantage. btw can u pass me the link of that ila’s article.
ya wpi calculations is very easy.. thats why most govts can give u a weekly figure.. while the CPI calculations are done over a monthly cycle.. and often due to the problems over collecting so much data and verifying it… these figures are usually a week or 2 old.
//but what one has to look at is also the percentage of fiscal deficit which is a good indicator of how the govt is running the show.//
I am relatively ok with having a controlled fiscal deficit… as long as the money is poured in developing infrastructure…
but I am also with you in the fact that almost 80 of the governmental spending going in non-planned expenditure… i.e. paying salaries to babus.. who don’t give a shit about the country.
[…] other news, Ankur has a nice post on why the inflation is low while the prices of all the commodities is skyrocketing. Ila explains it […]
i will make some data
sure do send them across.