How accurate is the WPI?

Vivian Fernandes, CNBC-TV18

The Wholesale Price Index has become the most-watched guage, after perhaps the Sensex and the Nifty. But does it accurately measure inflation. And does it correctly reflect the nature of the economy?

Last Saturday when Finance Ministry officials did a very visible deconstruction of the weekly increase in inflation, they attributed 94% of incremental rise to petroleum products. The Index of food articles declined by one percent, they said, and that of manufacted products by a third of a percentage point. The headline 11% rise in Wholesale Price Index tells a story, but not the whole story about the pinch on consumers.

Pronab Sen, Chief Statistician of India, said, "If you are interested in what is happening to the cost of living, then it is a very inaccurate measure."

From raw materials like iron ore, to intermediates like steel, capital goods like machinery, and goods we use, say cars, the Wholesale Price Index measures inflation across the value chain. But a squeeze on profitability could absorb some of the cost increases. Secondly, there is a time lag in the transmission of cost increases down the line. For political purposes, Consumer Price Index is a better measure, but it is released once a month, unlike the WPI.

"By the time CPI comes out, you will have three WPIs so it is history," says Sen. 

Typewriters, wrist watches, black and white televisions, sewing machines - these are some of items whose prices the WPI now measures. But the economy has moved on since 1993-94, which is the base year of the current Index. Some of these products have become obsolete, the economy is producing a wider array of products. The WPI basket of 435 items does not reflect this diversification. Which is why, the committee headed by Sen's brother Abhijit, has proposed that the base year be moved 15 years forward to 2004-056, with nearly 1200 products. But data collection is problematic.

Abhijit Sen, Member of Planning Commission, said, "We sent queries to 5,000 people. We got 50 replies. Industry is extremely unsupportive."

Pronab Sen says along with a revision of the WPI, it is time to move to monthly reporting, because in recent times there has been a gap of as much as one percentage point between provisional and final figures. That would reduce volatility in the bond and stock markets that closely track the WPI.  

A monthly Wholesale Price Index has many virtues. It will be more accurate. Manufacturers could also be less reluctant to part with data, though the government is fortifying a law that proposes a penalty of Rs 1,000 a day for defaulters for every day of default.