Finally, a more credible WPI
The Economic Times, November 26, 2009, Page 13
Tina Edwin, ET Bureau
The statistics ministry and the office of the economic adviser attached to the commerce and industry ministry finally got their way about a month ago (October 20) with the Union Cabinet agreeing to allow monthly release of the wholesale price index (WPI), the chief measure of inflation in the country.
As a compromise between those favouring and opposing monthly release of data, it was decided to continue with weekly reporting for two components of the index: primary products and fuel. And, the price data for the manufacturing sector was to be reported on a monthly basis.
A reasonable decision given that weekly data on primary products and fuel group experienced frequent volatility. Also, collecting data for these items is easier: weekly data on primary products is mostly sourced from mandis.
Similarly, as energy sector is dominated by government-owned companies and prices continue to be largely regulated, getting data of the fuel group is not difficult either. In contrast, getting regular data flow from the manufacturing sector was difficult.
Largely because the office of the economic adviser (OEA) depended on voluntary reporting by the manufacturing sector, populated mostly by the private sector, and small and medium enterprises. Many units would not file reports for weeks together, their contention being that there was no change in prices.
Of course, there have been instances when price changes were also reported with much lag, affecting the quality of data published. So, it was routine for the OEA to use the last reported data for the purpose of constructing the price index. For the OEA to follow up with manufacturing enterprises on a weekly basis was impossible: it simply did not have the adequate manpower.
Thus, it is not surprising that, overall, just about 18-20% of the items in the WPI basket were revised on a weekly basis.
Consequently, the revised data that was published eight weeks after the provisional numbers saw significant changes. Needless to say, often, the provisional numbers looked very different from the revised numbers and sometimes even led to unwarranted policy reaction.
It was to improve the quality data and policy response that the statistics ministry and OEA have been pushing for monthly reporting of the WPI data over the past year. Monthly reporting of WPI would have enabled the OEA to capture changes in prices of at least 60% of the items in the basket, as the officials would get enough time to follow up with business.
The working group for revision of the WPI set up under the chairmanship of Planning Commission member Prof Abhijit Sen had earlier recommended in its report that the WPI should be reported on a monthly basis. In any case, the norm across the world is to report inflation data on a monthly basis and most countries use consumer price index (CPI) as the primary measure of inflation in the economy.
India has been an outlier, not only does it use wholesale price as the primary measure but also reporting it on a weekly basis.
Sure, India has several CPIs that are released on a monthly basis — for industrial workers, for rural workers and for agricultural workers and the now-discontinued index for urban non-manual employees — but no comprehensive index covering the entire population. Work on introducing a comprehensive CPI for urban areas and for rural areas is underway.
Introduction of a combined CPI may take another two years, while CPI for urban areas (CPI-U) may be introduced next year.
The switch over to monthly reporting was delayed due to reservations of the finance ministry as well as the Reserve Bank of India, both responsible for anchoring inflation expectations as well as ensuring sustained economic growth.
They felt that monthly release of data would delay policy response, especially when prices were rising fast. One could argue that weekly data would have been made available to the finance ministry and the RBI on a selective basis for this purpose.
But bindings under the IMF’s Special Data Dissemination Standard (SDDS) does not allow signatory organisations to make such releases — much like the norms for dissemination of information by listed companies. Data on important macro indicators have to be made available to all users simultaneously.
This explains why the government chose the middle path, of releasing price data for primary commodities and fuel on weekly basis and manufacturing price data on monthly basis.
The real improvement in the quality of data in the sense of capturing price movements in the economy better may become visible only when the government shifts to the new series of WPI along with a change in the base year to 2004-05 from the current 1993-94.
This is expected to happen only in the new financial year. Shifting to the new series will mean more items that form the consumption basket will be counted and many items in the current series that have no or low demand would be weeded out.
The new series will comprise nearly 1,000 items compared to 435 in the current series. At the end of the day, the quality of the price index will depend on the response the OEA gets from businesses.
The Economic Times, November 26, 2009, Page 13
Tina Edwin, ET Bureau
The statistics ministry and the office of the economic adviser attached to the commerce and industry ministry finally got their way about a month ago (October 20) with the Union Cabinet agreeing to allow monthly release of the wholesale price index (WPI), the chief measure of inflation in the country.
As a compromise between those favouring and opposing monthly release of data, it was decided to continue with weekly reporting for two components of the index: primary products and fuel. And, the price data for the manufacturing sector was to be reported on a monthly basis.
A reasonable decision given that weekly data on primary products and fuel group experienced frequent volatility. Also, collecting data for these items is easier: weekly data on primary products is mostly sourced from mandis.
Similarly, as energy sector is dominated by government-owned companies and prices continue to be largely regulated, getting data of the fuel group is not difficult either. In contrast, getting regular data flow from the manufacturing sector was difficult.
Largely because the office of the economic adviser (OEA) depended on voluntary reporting by the manufacturing sector, populated mostly by the private sector, and small and medium enterprises. Many units would not file reports for weeks together, their contention being that there was no change in prices.
Of course, there have been instances when price changes were also reported with much lag, affecting the quality of data published. So, it was routine for the OEA to use the last reported data for the purpose of constructing the price index. For the OEA to follow up with manufacturing enterprises on a weekly basis was impossible: it simply did not have the adequate manpower.
Thus, it is not surprising that, overall, just about 18-20% of the items in the WPI basket were revised on a weekly basis.
Consequently, the revised data that was published eight weeks after the provisional numbers saw significant changes. Needless to say, often, the provisional numbers looked very different from the revised numbers and sometimes even led to unwarranted policy reaction.
It was to improve the quality data and policy response that the statistics ministry and OEA have been pushing for monthly reporting of the WPI data over the past year. Monthly reporting of WPI would have enabled the OEA to capture changes in prices of at least 60% of the items in the basket, as the officials would get enough time to follow up with business.
The working group for revision of the WPI set up under the chairmanship of Planning Commission member Prof Abhijit Sen had earlier recommended in its report that the WPI should be reported on a monthly basis. In any case, the norm across the world is to report inflation data on a monthly basis and most countries use consumer price index (CPI) as the primary measure of inflation in the economy.
India has been an outlier, not only does it use wholesale price as the primary measure but also reporting it on a weekly basis.
Sure, India has several CPIs that are released on a monthly basis — for industrial workers, for rural workers and for agricultural workers and the now-discontinued index for urban non-manual employees — but no comprehensive index covering the entire population. Work on introducing a comprehensive CPI for urban areas and for rural areas is underway.
Introduction of a combined CPI may take another two years, while CPI for urban areas (CPI-U) may be introduced next year.
The switch over to monthly reporting was delayed due to reservations of the finance ministry as well as the Reserve Bank of India, both responsible for anchoring inflation expectations as well as ensuring sustained economic growth.
They felt that monthly release of data would delay policy response, especially when prices were rising fast. One could argue that weekly data would have been made available to the finance ministry and the RBI on a selective basis for this purpose.
But bindings under the IMF’s Special Data Dissemination Standard (SDDS) does not allow signatory organisations to make such releases — much like the norms for dissemination of information by listed companies. Data on important macro indicators have to be made available to all users simultaneously.
This explains why the government chose the middle path, of releasing price data for primary commodities and fuel on weekly basis and manufacturing price data on monthly basis.
The real improvement in the quality of data in the sense of capturing price movements in the economy better may become visible only when the government shifts to the new series of WPI along with a change in the base year to 2004-05 from the current 1993-94.
This is expected to happen only in the new financial year. Shifting to the new series will mean more items that form the consumption basket will be counted and many items in the current series that have no or low demand would be weeded out.
The new series will comprise nearly 1,000 items compared to 435 in the current series. At the end of the day, the quality of the price index will depend on the response the OEA gets from businesses.
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