Insights of New Consumer Price Indices of India

Transcription

1 Insights of New Consumer Price Indices of India Dr Rinalini Kakati, Dept. of Business Administration, Gauhati University Rashmi Rekha Mahanta, Dept. of Business Administration, Gauhati University Abstract The confusion regarding what should be the best measure of inflation rate in our country remains among the financial analysts and policy makers over a period of time. Prior to April 2014, over the years India had been the only country among the South Asian and Developed Nations using Wholesale Price Index (WPI) as measure of inflation rate. Being subjected to lot of controversies over WPI s effectiveness, the new Consumer Price Indexes (CPIs) have been launched since April 2014 to make the inflation rate more reflective for all sections of people. This paper makes an attempt to evaluate the new CPIs in terms of its need rather than the WPI and its implication to the economy. INTRODUCTION According to the International Monetary Fund, inflation is an important economic statistic because it affects the value of money and indicates the overall stability of a country's economy. And, to measure this significant statistic, the price index is used. The price index is an indicator of the average price movement over time of a fixed basket of goods and services. In case of India, different price indices are used to measure inflation, namely, Wholesale Price Index (WPI), Consumer Price Index (CPI). Thus, a multiple number of indices are used in India. In this context therefore, the Former Reserve Bank of India (RBI) Governor, D Subbarao, in a 2010 speech at the Peterson Institute for International Economics in Washington DC, summed up the problem in these words: In India, we have one wholesale price index and four consumer price indices. There are ongoing efforts at a technical level to reduce the number of consumer price indices, and I believe the technical issues are not insurmountable. But that still will not give us a single representative inflation rate for an emerging market economy with market imperfections, diverse geography and 1.2 billion people. But, at the same time it should not be forgotten that in a big country like India, where different sectors coexist, a single index cannot be used to capture inflation, however broad that index may be. This is because, the indices should be able to cover adequately the different population groups, the commodity basket, base year and the weights assigned to commodities according to their relative importance. Nadhanael (2010) found that ambiguity in inflation assessment resulting from deficiencies in data on prices could pose significant challenges for the conduct of monetary policy. In India, in view of the large divergence between CPI and WPI inflation trends in the past, wide dispersion in inflation across commodity groups within WPI, and significant volatility in WPI inflation under the influence of supply shocks, the statistical limitations of prices data have received increasing attention in the policy debates. OBJECTIVE: The objective of this paper is this paper is (i) To highlight the gap between WPI and CPI in terms of items coverage, weights. (ii) To understand the need for creation of new CPIs and implications in our economy. LITERATURE REVIEW Nadhanael et al (2010) recognizing the fact that in India, statistical challenges relating to prices data for the conduct of monetary policy have come to the forefront of policy debate in view of the record levels of 190 Dr Rinalini Kakati, Rashmi Rekha Mahanta

2 divergence between CPI and WPI inflation and spikes in inflation in essential commodities within the WPI, this paper sought to explain the key issues of ambiguity in inflation assessment resulting from deficiencies in price data that could pose significant challenges for the conduct of monetary policy. A comparison of the WPI inflation against the GDP deflator suggested that both track each other almost perfectly, which may lead one to draw the wrong inference that the usual arguments against WPI in terms of non-inclusion of services and non-revision of the index to capture the structural changes in the economy are not very relevant. The study concluded that given the general practice adopted in other countries, and also the usual emphasis of price stability objective in enhancing consumer welfare, availability of data on CPI-Urban and CPI-Rural, and some form of aggregation of the two that could yield a representative CPI for the country as a whole over time, would address a major data gap in India from the standpoint of use of relevant inputs for the conduct of monetary policy. It also pointed out that, while different prices data covering specific segments of the population/regions of the country were necessary to assess their economic conditions in relation to developments taking place at the aggregate level in the economy, for the conduct of monetary policy, however, a single representative measure of inflation that could be available with limited time lag may have to be aimed at over time. Thus, the paper highlighted the scope for possible misleading inferences due to data deficiencies and also suggests the areas where improvements in data collection and dissemination may serve the monetary policy needs of India better in future. Gupta et al (2014) reviewed the calculation of Indian wholesale and consumer price indices and suggested improvements in the light of past experience and international best practices. It confirmed that food inflation has been the driver of domestic inflation. The paper studied the recommendations of the Urjit Patel Committee and commented that monetary policies predominantly focused on inflation targeting may not necessarily be effective in India where inflation and inflationary expectations, compared to developed countries, are not that driven by excess demand. A number of shortcomings in storage, distribution and supply bottlenecks are also relevant. The paper also suggests that the efficiency of price discovery mechanisms including those that are relevant for the financial sector need to be improved to enhance the effectiveness of an explicit inflation targeting regime. In this context, the paper lists the approach taken by a few prominent central bankers to inflation targeting post the widespread financial-economic meltdown of Lulla (2010) discussed about the issues in the measurement of inflation in India along with the analysis of inflationary trends in India from the 1950s and its current status. The study found that India had been experiencing significant price instability in the recent past. Even though, the sources of the phenomenon could be attributed to both internal as well as external factors, correction of the problem would have to take place mainly through effective domestic economic policies for both the demand management and supply adjustment. The domestic policy measures initiated in India had not been able to bring any significant effects in controlling price volatility in the country. Annual inflation rate measured by WPI turned negative for June 2009, mainly due to high base effect. The researcher termed it as disinflation rather than deflation as demand for different commodities remained still high. Due to rising food prices, the Food index was very high and hence, CPI had been ruling very high. Patnaik et al (2011) attempted to find the best measure of Inflation in India, which would also be the most relevant measure for monetary policy making in India. While trying to explain the best measure of Inflation in India, factors like timeliness, weights in the price index, accuracy of food price measurement, and inclusion of services were taken into account. The study concluded that, under the present conditions of measurement, the consumer price index for industrial workers i.e. CPI (IW), despite some serious deficiencies, was preferable to the wholesale price index (WPI) and the GDP-deflator as headline inflation rate. Thus, macroeconomic analysis and policy thinking need to move away from a focus on the WPI to the CPI-IW. Kayhan et al (2015) emp irically investigated whether Consumer Price Index as argued by the proponents of inflation targeting, or Producer Price Index as argued by the opponents of inflation targeting (Frankel, 2011, 2012) were better tool to be employed in targeting inflation in Turkey. The study suggested that the influence of producer price on the inflation rate was short term and weak. Similarly, it had been found that there was not a significant impact of producer price on the inflation rate during the expansionary period and it was also possible to talk about the effect of supply side shocks in the recession regime. The study also found the consumer price index to be an appropriate instrument to target inflation rate in Turkey although the producer price index may be taken into account to target inflation during the recessionary period. Shahbaz et al (2010) examined the relationship between wholesale 191 Dr Rinalini Kakati, Rashmi Rekha Mahanta

3 prices and consumer prices in a small open economy like Pakistan. Results showed that there existed a longrun relationship between WPI and CPI in Pakistan. Furthermore, then findings also revealed that there revealed a bidirectional causal relationship between WPI and CPI and that its behavior running from WPI to CPI was comparably stronger. Thus, the overall findings included robust evidence that, for Pakistan, there was strong bidirectional causality running from wholesale prices to consumer prices as assumed in the conventional wisdom of the theoretical literature. GAP BETWEEN WPI AND CPI Evolution of WPI The Office of the Economic Adviser to the Government of India undertook to publish for the first time, an index number of wholesale prices, with base week ended August 19, 1939 = 100, from the week commencing January 10, The index was calculated as the geometric mean of the price relatives of 23 commodities classified into four groups: Food & tobacco; Agricultural commodities; Raw materials; and Manufactured articles. That was a modest beginning to what became an important weekly activity for the monitoring and management of the Indian economy and a benchmark for business transactions. In fact, WPI has been in use in India since 1939 and is being published since 1947 regularly. But, as economies undergo drastic changes with change in time, a need for revisiting WPI also came up. Thus, since 1939, the base year of WPI has been revised on number of occasions. Revision of WPI It has generally been the practice to revise the weighting diagram and the series of WPI based on the recommendations of a Working Group appointed by the Government, roughly once every decade. Ever since the introduction of the WPI on a regular basis, five revisions have taken place introducing the new base years, viz., , , , and The series of Wholesale Prices Index with a base year of reflected the structure of economy nearly 20 years ago. In order that the index adequately reflected the current structure of the economy, a Working Group for the revision of the index numbers for wholesale prices in India was constituted on December 26, 2003 under the Chairmanship of Prof. Abhijit Sen, Member, Planning Commission. Therefore, the latest revision of WPI had been done by shifting base year from to Accordingly, this New Series with base year had been launched on 14th September, 2010, and has 676 items in the commodity basket. There has been a significant increase in number of items for each item, particularly in the manufacturing segment, not only to better reflect the structural shifts but also to make WPI more broad base. The weighting diagram for the new WPI series ( base year) has been derived on the basis of Gross Value of Output (GVO).The output values at current prices, wherever available at appropriate disaggregation, have been obtained from the National Accounts Statistics (NAS), 2007 published by the Central Statistical Organization, Ministry of Statistics & Programme Implementation. WPI, as an inflation indicator, was most extensively used by Government, banks, industry and business circles in India because it captured price movements in a most comprehensive way. The movement of WPI serves as an important determinant, in formulation of trade, fiscal and other economic policies by the Government of India. The WPI indices were also used for the purpose of escalation clauses in the supply of raw materials, machinery and construction work. In other words, WPI achieved considerable significance overtime since it was the only index that gives the idea of week-to-week fluctuations of the prices of all the traded commodities. Criticism against WPI: The major criticism for this index is that 'the general public does not buy at the wholesale level', thus WPI does not give the actual feeling of the amount of pressure borne by the general public. However, from the point of view of policy-making, there are two major shortcomings of WPI which necessitated to the government of India to make a shift from WPI to CPI. These two drawbacks are: i. WPI excludes prices of services such as education, healthcare, and rents. But, services now account for nearly 60 per cent of GDP. As a result, inflation in these services is largely determined by the domestic 192 Dr Rinalini Kakati, Rashmi Rekha Mahanta

4 demand-supply situation. Whereas, the new CPI assigns nearly 36% weightage on services which includes price changes in housing, education, healthcare, transport and communication, personal care and entertainment. ii. Second, WPI assigns nearly 15% and 10.7% weightage for the fuel group and metal and metal products group, respectively. Any sharp movements in international prices of fuels and metals, therefore, lead to sharp changes in WPI. This was visible in calendar year 2009 when WPI inflation fell below 2%, in 8 out of 12 months. Table 1: History of WPI Base Year Year of Introduction No. of Items in the WPI Week ended 19 th August End August ( as weight base) July January July April September Table 2: A Comparative Statement of Weights and Number of Items Assigned to Different Commodity Groups under the last two revisions Broad Groups Weights Number of Items All Commodities Primary Articles Fuel and Power Manufactured Products After analyzing the Old and Revised series of WPI, it has been found that: The total number of items had increased in the revised series from 435 to 676. Besides, the number of items in the Primary Articles category had been increased from 98 to 102, and that of Manufactured Products from 318 to 555. However, the number of items remained same for Fuel and Power. The weights of Primary Articles have been reduced from 22.02% to 20.12%, but that of Fuel and Power (from 14.23% to 14.91%) and Manufacturing Products had (63.75% to 64.97%) increased in the revised series. 193 Dr Rinalini Kakati, Rashmi Rekha Mahanta

5 Table 3: Difference in the Weights of Common Items between the Old WPI Series ( =100) and Revised WPI Series ( =100) Commodity Groups Weights ( ) Weights ( ) All Commodities Primary articles A. Food Articles B. Non-Food Articles C. Minerals Fuel and Power A. Coal B. Mineral Oils C. Electricity Manufactured Products A. Food Products B. Beverages, Tobacco & Tobacco Products C. Textiles D. Wood & Wood Products E. Paper& Paper Products F. Leather and Leather Products G. Rubber & Plastic Products H. Chemical & Chemical Products I. Non-Metallic Mineral Products J. Basic Metal, Alloys & Metal Products K. Machinery & Machine Tools L. Transport, Equipment & Parts From the table 3, regarding the sub-categories weight of item common between both the WPI series, it could be found that: In the Primary Articles category, the weights of Food and Non-Food Articles are less in the Old WPI series compared to the Revised WPI. Only the weight of Minerals is high in the revised series. In Fuel and Power category, the weight of Electricity is more in the Old series, but that of Coals and Mineral Oils are less in the Old series. In the Manufactured Products category, the sub-category weights are more or less same in both the series, except for the Food Products which is high in the Old WPI series compared to the revised series. HISTORICAL SHIFT FROM WPI TO CPI IN INDIA When other developing economies were using Consumer Price Index as the main measure of inflation, India chose to use the Wholesale Price Index due to its national coverage and timeliness of release. It is only recently (April, 2014) that the government made a bold and well thought out decision to move to the CPI to measure the inflation rate in the Indian economy. So far, RBI chose WPI over CPI, largely for two reasons. i. First, until 2011, there was no single CPI, representative of the whole country. There were three or four CPI measures, relevant for different segments of population. Now, we have one representative measure of retail inflation with further disaggregation to see how prices in rural and urban India are changing. ii. Second, WPI was earlier available with a shorter lag, only a 2-week delay compared with CPI inflation which came with a 2-month lag. Now, CPI monthly inflation data is released couple of days prior to WPI inflation data for the same month. The conceptual case for moving to CPI rests on two points. 194 Dr Rinalini Kakati, Rashmi Rekha Mahanta

6 i. First, WPI excludes prices of services such as education, healthcare, and rents. However, services now account for nearly 60 per cent of GDP and a vast majority of these services are not traded with other countries. As a result, inflation in these services is largely determined by the domestic demand-supply situation. Conversely, the new CPI measure assigns nearly 36%weightage on services and includes price changes in housing, education, healthcare, transport and communication, personal care and entertainment. CPI, therefore, is a better reflector of demand side pressures in the economy, than wholesale prices. ii. Second, WPI assigns nearly 15% and 10.7% weightage for the fuel group and metal and metal products group, respectively. Any sharp movements in international prices of fuels and metals, therefore, lead to sharp changes in WPI. This was visible in calendar year 2009 when WPI inflation fell below 2%, in 8 out of 12 months. A sharp decline in WPI resulted in a swift and sharp lowering of the repo rate to 4.75% by April 2009 from 9% in July During the same year, CPI (industrial workers) inflation averaged nearly 11%. Thus, the RBI has made the wise decision to move to the CPI (both urban and rural) and update the base from 2010 to CPI is a much broader measure than WPI and tracks the prices of the basket of goods and services that have an impact on the common people as well as the high flying corporate class. The WPI becomes an ineffective measure also because it is strongly influenced by the fluctuation in global prices of tradable goods and the ever prevalent currency fluctuations. Evolution of CPI in India A Consumer Price Index (CPI), which is designed to measure the changes over time in general level of retail prices of selected goods and services that households purchase for the purpose of consumption, is widely used as macroeconomic indicator of inflation, and also as a tool by government and central banks for targeting inflation and monitoring price stability. CPI is also used as deflators in the National Accounts. Therefore, CPI is considered as one of the most important economic indicators. (Source: CPI Manual, MOSPI).Till January 2012, in India there were only three CPIs compiled and released on national level. 1. CPI for Industrial Workers (IW) (base 2001), 2. CPI for Agricultural Laborer (AL) /Rural Laborer (RL) (base ) 3. CPI for Urban Non-Manual Employees (UNME) (base ), The first two are compiled by the Labor Bureau in the Ministry of Labor and Employment, and the third is compiled by Central Statistical Organization (CSO) in the Ministry of Statistics and Programme Implementation. Need for the New CPI The three CPIs mentioned above reflect the effect of price fluctuations of various goods and services consumed by specific segments of population in the country. These indices, however, do not encompass all the segments of the population in the country and as such do not reflect true picture of the price behavior in the country. To overcome this problem, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation started compiling a new series of CPI for the entire urban population, viz. CPI (Urban), and CPI for the entire rural population, viz. CPI (Rural), which would reflect the changes in the price levels of various goods and services consumed by the urban and rural population. These new indices are compiled at State/UT and all-india levels. Thus, we have- 1. CPI for the entire urban population, i.e. CPI (Urban); 2. CPI for the entire rural population, i.e. CPI (Rural) 3. Consolidated CPI for Urban + Rural, i.e. CPI (Combined) Initially, the indices were compiled by the CSO on base 2010 = 100. The consumption patterns (weighting diagrams) for this series of CPI was derived on the basis of average monthly consumer expenditure of an urban/rural household obtained from the results of the 61st Round of CES conducted by the National Sample Survey Office during Thus, the Central Statistics Office (CSO), Ministry of Stat istics and Programme Implementation started releasing Consumer Price Indices (CPI) on base 2010=100 for all-india and States/UTs separately for rural, urban and combined every month with effect from January, The 195 Dr Rinalini Kakati, Rashmi Rekha Mahanta

7 Price Reference Year (i.e. the year in which the prices, of goods and services consumed, are taken as base price that is the CPI = 100) for the New CPI series was 2010, whereas Weight Reference Year (i.e. the year in respect of which the data of consumer expenditure was used to compute weights for aggregating elementary indices to compile higher level indices i.e. sub-group, group and overall indices) is Ideally, these two reference years should be identical so that prices are collected of those items which belong to the basket of consumers in true sense. It is not always possible to have both the reference years identical, but it is desirable to minimize the gap between these two. The base year has been accordingly revised from 2010 to 2012, and the revised series is released w.e.f. January, With this change, the gap between Weight Reference Year and Price Reference Year (Base Year), which was six years in the old series, has now been reduced to six months only. CPI Weights Weighing diagram gives the share of each item in the total consumption expenditure in a CES. The weighing diagrams for the CPI series (Base 2012=100) have been derived on the basis of average monthly consumer expenditure of an urban/rural household. Only consumption expenditure has been considered for the purpose of preparation of weighing diagrams. Non-consumption expenditures, like legal expenses etc. have been excluded. Table 4: All India Sub-group/Group Weights of Revised New CPI (base 2012) Sl No Broad Group / Sub-Group CPI-R CPI-U CPI-C 1 Food and beverages Cereals and products Meat and fish Egg Milk and products Oils and fats Fruits Vegetables Pulses and products Sugar and Confectionery Spices Non-alcoholic beverages Prepared meals, snacks, sweets etc Pan, tobacco and intoxicants Clothing and footwear Clothing Footwear Housing Fuel and light Miscellaneous Household goods and services Health Transport and communication Recreation and amusement Education Personal care and effects All Groups CPI (Rural) for housing is not compiled 196 Dr Rinalini Kakati, Rashmi Rekha Mahanta

8 Table 5: Comparison of weights of Old CPI (2010 base) and Revised CPI (2012 base) Series Old CPI (Base 2010) weights Revised CPI (Base 2012) weights computed on the basis of CES computed on the basis of CES Sl No Broad Group/ Sub-Group CPI Rural CPI Urban CPI Combined CPI Rural CPI Urban CPI Combined 1 Food and beverages Pan, tobacco and 2 intoxicants Clothing and footwear Housing Fuel and light Miscellaneous Total i. The number of Groups, which was five in the old series, has now been increased to six. Pan, tobacco and intoxicants, which was a Sub-group under the earlier Group Food, beverages and tobacco, has now been kept as a separate Group. Accordingly, the Group Food, beverages and tobacco has been renamed as Food and beverages. ii. Egg, which was part of the Sub-group Egg, fish and meat in the old series, has now been kept as a separate Sub-group. Accordingly, the earlier Sub-group has been modified as Meat and fish. iii. Due to change in consumption pattern, a few additional items appeared in the CPI basket. Market Survey was conducted in 2014 to identify shops, fix their specifications and collect prices. List of additional priced items, included in the CPI basket after the market survey at all India level, is at Annexure-VI. All these additional priced items may not be available in all the States/UTs. State/UT-wise number of weighted and priced items is given at Annexure-VII and Annexure-VIII respectively. As Base Year is 2012, Base Prices of such additional/new items have been imputed as per the methodology mentioned in the UN document Practical Guide to Producing Consumer Price Indices. iv. The elementary/item indices are now being computed using Geometric Mean (GM) of the Price Relatives of Current Prices with respect to Base Prices of different markets in consonance with the international practice. In the old series, Arithmetic Mean (AM) was used for that purpose. The advantage of using GM is that it moderates the volatility of the indices as GM is less affected by extreme values. v. Prices of PDS items under Antyodaya Anna Yojana (AAY) have also been included for compilation of indices of PDS items, in addition to Above Poverty Line (APL) and Below Poverty Line (BPL) prices being taken in the old series. vi. Sample size for collection of house rent data for compilation of House Rent Index, which was 6,684 rented dwellings in the old series, has now been doubled to 13,368 rented dwellings in the revised series. Contribution of New CPIs over WPI: The CPI (base year 2012 ) and WPI (base year ) differed conceptually from each other on the following grounds: i. Consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households, whereas WPI measures the changes in the price level of commodities after they leave factory premises, i.e. at the wholesale level. ii. While the New CPI was measured on base year 2012, the revised WPI was measured on base year iii. The New CPI with base year 2012 comprises 299 commodities, whereas the revised WPI with base year incorporated a basket with 676 commodities. iv. The CPI basket of goods is very different from the WPI basket. The CPI is like our shopping basket. The new CPI has six sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear, Miscellaneous and Pan, tobacco and intoxicants. The weightage differ for the rural and urban baskets. On the other hand, WPI comprised of three major commodity divisions, namely, Primary Articles, 197 Dr Rinalini Kakati, Rashmi Rekha Mahanta

9 Fuel & Power and Manufactured Products. Different weights have been assigned to each of the product groups. The weighting pattern in CPI revealed that the highest weightage in Combined CPI has been assigned to the Food and Beverages group (45.86%). However, the internal weighting pattern shows that the CPI Rural gets the maximum weights (54.18%) compared to the CPI Urban and CPI Combined. The second highest weight in Combined CPI has been assigned to the Miscellaneous category (28.32%) that includes services like Transport and Communication, Health, Education etc. In this segment, the maximum internal weight has been assigned to the CPI Urban (29.53%). The third rank in Combined CPI weights has been assigned to Housing category with 10.07%. But, an interesting feature is that CPI Urban has been given the maximum internal weightage of 21.67%, while no compilation is done in case of CPI Rural housing. Among the rest of the commodity groups, fourth rank has been assigned to Fuel and Light group (6.84%), followed by Clothing, bedding and footwear (6.53%), and Pan, tobacco and intoxicants (2.38%). On the other hand, in case of WPI weighting pattern, the highest weightage has been given to the Manufacturing Products (64.97%). There are many subgroups in this category; some of the main ones are chemical and chemical products, basic metals, alloys and metal products, food products, machinery and machine tools and textiles. Though these items may not affect us directly, but indirectly, it means that price changes in products, such as vehicles, clothes, furniture, soaps and shampoo, etc would affect the common masses. The second highest weightage has been assigned to the Primary articles (20.11%), the prices of which impact our daily sustenance and it hits the poor the hardest. Among food articles, some of the main heads are foodgrain, fruits and vegetables, eggs, meat and fish. In the non-food subgroup, some of the major heads are fibre and oil seeds. The lowest weightage has been assigned to the Fuel and Power group (14.91%) that consists of prices for all materials and items needed to produce power and fuel. This group consists of three subgroups coal, mineral oils and electricity. The subgroup mineral oil has the maximum weight of 9.36% (of the overall index). Items such as kerosene, diesel, liquefied petroleum gas (LPG) and petrol fall in this category. v. There are some common components in both the CPI and WPI baskets such as food and fuel. But, the composition of the two indices is such that while food has a higher weightage in CPI, manufacturing has a higher weightage in WPI. The weight of Food Products is much higher in CPI (45.86%) as compared to WPI around (25% approx). As a result, the CPI is more susceptible to changes in food prices than the WPI. Again, in case of Fuel and Power the weight is 6.84 in New CPI, whereas it is in WPI. Thus, WPI is more sensitive to changes in fuel prices. vi. Another important difference arises from the fact that while WPI does not cover services, the commodity basket of New CPI includes certain personal services such as medical care, education, recreation and amusement, transport and communication and personal care and effects. Considering that Indian economy is a services economy, these domestic services are important if we want to assess the price increase for the general population. vii. The difference between the WPI and CPI indices were analyzed in terms of the annual inflation rates over the last four years period from 2012 to 2015, as given below: IMPLICATIONS OF ADOPTING THE NEW CPI AS THE CHIEF INFLATION INDICATOR IN INDIAN ECONOMY In 2014, the RBI had to take a critical decision, i.e. whether to stand by the manufacturers and keep the current policy of calculating inflation from their end or switch to calculating inflation from the consumer s end. At this crucial moment, Mr. Raghuram Rajan (Former RBI Governor) constituted the famous Urjit Patel (Current RBI Governor, then RBI Deputy Governor) committee. This committee decided to adopt the New CPI as the chief measure of inflation in India because it was thought to better assess inflation expectations because it is the CPI that reflects the actual cost of living of the people. Besides, retail inflation is a superior indicator of the underlying demand situation in the economy, which determines the extent to which retailers can pass on a sustained rise in wholesale prices. While, in a strong demand environment, retailers can pass on the entire increase in wholesale prices or even more to their end-consumers, if demand remains weak, retailers could witness pressure on margins. Another reason attributed to the moving over to the New CPI at that point 198 Dr Rinalini Kakati, Rashmi Rekha Mahanta

10 in time is the exclusion of the services from the WPI index - something which is a major part of the Indian economy and has supported and shaped the growth of Indian economy for the past decade or so. Table 6: The New-CPI (base 2012=100) Inflation Rate (%) over the last four years ( ) Months Inflation Rate (%) CPI-R CPI-U CPI-C Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Dr Rinalini Kakati, Rashmi Rekha Mahanta

11 14.0 Inflation Rate (%) of CPI-Rural Inflation rate Jan-2012 Mar-2012 May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013 Jul-2013 Sep-2013 Nov-2013 Jan-2014 Mar-2014 May-2014 Jul-2014 Sep-2014 Nov-2014 Jan-2015 Mar-2015 May-2015 Jul-2015 Sep-2015 Nov Inflation Rate (%) of CPI-Urban Inflation Rate of CPI-Urban Dr Rinalini Kakati, Rashmi Rekha Mahanta

12 Inflation Rate (%) of CPI-Combined Inflation Rate of CPI- Combined Table 7: WPI (base ) Inflation Rates (%) over the last ten years ( ) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Dr Rinalini Kakati, Rashmi Rekha Mahanta

13 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Dr Rinalini Kakati, Rashmi Rekha Mahanta

14 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Dr Rinalini Kakati, Rashmi Rekha Mahanta

15 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec WPI Inflation Rate (%) Jan-2006 Jun-2006 Nov-2006 Apr-2007 Sep-2007 Feb-2008 Jul-2008 Dec-2008 May-2009 Oct-2009 Mar-2010 Aug-2010 Jan-2011 Jun-2011 Nov-2011 Apr-2012 Sep-2012 Feb-2013 Jul-2013 Dec-2013 May-2014 Oct-2014 Mar-2015 Aug WPI Inflation Rate 204 Dr Rinalini Kakati, Rashmi Rekha Mahanta

16 Table 8: Gap in the Inflation rates (%) of WPI and CPI-Combined Gap in the Inflation rates (%) of WPI and CPI-C Months WPI CPI-C Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Dr Rinalini Kakati, Rashmi Rekha Mahanta

17 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Gap in the Inflation Rates (%) of WPI and CPI- Combined Jan-2012 Mar-2012 May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013 Jul-2013 Sep-2013 Nov-2013 Jan-2014 Mar-2014 May-2014 Jul-2014 Sep-2014 Nov-2014 Jan-2015 Mar-2015 May-2015 Jul-2015 Sep-2015 Nov WPI CPI-C 206 Dr Rinalini Kakati, Rashmi Rekha Mahanta

18 BIBLIOGRAPHY 1. Gupta, K., & Siddiqui, F. (2014). Salient features of measuring, interpreting and addressing Indian inflation. Indian Council for Research on International Economic Relations, Working Paper, (279). 2. Kayhan, S., Kar, M., & Şahbaz, A. (2015). Is CPI a suitable tool for inflation targeting? A critical view. Theoretical and Applied Economics, 22(3 (604), Autumn), Lulla, J. (2009). Inflation in India: Trends, Status and Issues. SIES Journal of Management, 6(2), Nadhanael, G. V., & Pattnaik, S. (2010). Measurement of Inflation in India: Issues and Associated Challenges for the Conduct of Monetary Policy. RBI Staff Papers, Reserve Bank of India. 5. Patnaik, I., Shah, A., & Veronese, G. (2011). How should inflation be measured in India?. Economic and Political Weekly, Shahbaz, M., Wahid, A. N., & Haider, A. (2010). Empirical psychology between wholesale price and cons umer price indices: the case of Pakistan. The Singapore Economic Review, 55(03), mospi.nic.in/ 9. mospi.nic.in/central-statistics-office-cso Dr Rinalini Kakati, Rashmi Rekha Mahanta