July 20 (Bloomberg) -- India will adopt a new consumer price index next year after policy makers said the current main inflation gauge of wholesale prices doesn’t reflect the true costs borne by people.
India’s statistics department releases four consumer price indices for different groups such as farm and industrial workers. The central bank and the finance ministry use the wholesale price index as the benchmark as the other inflation measures don’t capture the aggregate price picture.
“For macro purposes, you need a unified consumer price index,” Pronab Sen, the top bureaucrat in India’s statistics ministry said in an interview on July 17. “We are hopeful that by the end of next year we should be able to come up with one.”
Gains in the weekly wholesale prices hovered near 1 percent in May while increases in the four consumer indices, announced monthly, ranged between 7 percent and 10 percent. Governor Duvvuri Subbarao said the divergence in various price measures “complicates” monetary policy formulation while Finance Secretary Ashok Chawla said the “disconnect” must be rectified.
“The issue is causing some problems at this point in time,” said Chawla, the top bureaucrat in India’s finance ministry. “Policy makers have to tread with a certain amount of caution.”
Sen said the only “compelling” logic for a unified consumer price index is for monetary policy purposes, as there is nothing “intrinsically wrong” with the wholesale price gauge and the four consumer price measures.
‘Legitimate Information’
The wholesale price index provides a snapshot of producer prices while the consumer price gauges show the final cost paid by consumers.
“So you can have a situation where wholesale prices are going down and consumer prices are rising, and what it’s basically saying is that the cost of production is decreasing and that’s legitimate information,” Sen said.
“Similarly, regarding consumer prices, whose cost of consumption am I interested in?” Sen asked. “As far as the government is concerned, you would want to measure the cost of living of the most disadvantaged part of society.”
And the existing consumer price indices do exactly that, Sen said.
The consumer price index for agriculture labor measures the poorest segment of the rural population while the consumer price index for industrial workers measure the weakest part of India’s urban centers, Sen said.
He said the statistics department will continue to release the existing consumer indices and the wholesale index even after the new, unified consumer index is unveiled next year.
Measuring Services
The new consumer index, with a base year of 2007-2008, will be compiled from a sample of 2,000 villages, Sen said. He said the statistics department has subcontracted the field work to the postal department, which has put 2,400 people on the job.
Statistics in India haven’t kept pace with other changes in the economy as well, he said.
“The biggest problem is measuring services,” whose share in India’s $1.2 trillion economy has doubled to about 55 percent in the past two decades, Sen said.
“The bulk of our growth is coming from services, which is not the case with China, where growth is powered by manufacturing,” Sen said. “Traditional statistical systems are much better at measuring physical products and are in fact pretty bad at measuring services.”
There are some services such as transport that can be measured and “almost everything else can’t,” Sen said.
Extracting Teeth
“For example, how do you define the product of a dentist,” Sen asked. “Extraction of a front tooth is a different product from the extraction of a back tooth,” he said.
Similarly, in insurance, there are so many products and each one of them is unique, Sen said. “Even if two people have the same life insurance product with the same coverage, their premium will be different -- what premium do I use,” he asked.
The problems in measuring services don’t hinder computation of the gross domestic product, which can be arrived at by ascertaining the turnover of the services, Sen said.
“The reason we need it is because all economic systems require an early measurement of what’s happening in the economy,” Sen said. “The GDP we can announce at best quarterly and that too comes after a two-month lag. If you want to know what’s happened to services last month, we won’t know.”
“This is an area where a lot of research work is going on around the world,” Sen said.
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