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Why WPI is preferred over CPI to calculate the inflation rate in India



Presented by:Nitin Sardana (2010205) Sakshi Agarwal (2010206) Sankha Dip Datta (2010207) Shourjo Sengupta (2010219) Susnata Chakraborty (2010236) Veethika Pande (2010249)

Switch over to CPI regime: BJPNew Delhi, Dec 15 (India Blooms News Service) The Bharatiya Janata Party (BJP) slammed the Congress-led UPA government for petrol price hike and demanded immediate withdrawal of it. BJP MP said this hike was tailored on the presumption that the inflation is down but this is not the real reflection as far as the food prices in the market are concerned. The Govt. changed the whole basis of calculating Wholesale Price Index (WPI) in Aug 2010. It changed its base year from 93-94 to 2004. It increased the basket of 435 items to 676 items. Due to these changes the weightage of food articles has gone down from 15.4% to 14.3%. And more surprisingly, the food grains per se account for only 0.4% in the new series. People are actually experiencing higher prices in the market than what is declared in the WPI. BJP demands that Govt. should immediately switch over to CPI regime.

Introduction Sharp movements in prices, upward or downward has always been a matter of concern world over and regarded as a major economic problem. It is essential for any government to compute the Inflation rate accurately to frame its policies. Lately, in India, with frequent hikes in fuel prices, inflation has become an important issue and the method of computation of inflation, a huge topic of debate.

Price Indices in India The two major price indices in the Indian context are Wholesale Price Index (WPI) and Consumer Price Index (CPI). WPI is more widely accepted in India and it takes into account the wholesale prices, i.e., the prices charged by the wholesalers. CPI takes into account the consumer prices or retail prices. In India CPI is calculated mainly under four different heads: CPI for Industrial Workers (CPI-IW) CPI for Urban Non-Manual Employees (CPI-UNME) CPI for Rural Labourers (CPI-RL) CPI for Agricultural Labourers (CPI-AL)

Wholesale Price Index WPI was first published in 1902, and was one of the most widely accepted economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s. WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. The Indian government has taken WPI as an indicator of the rate of inflation in the economy. Till August 2010, in India, a total of 435 commodities data on price level was tracked through WPI taking 1993-94 as the base year. In August 2010, the WPI computation in India was revised and a basket of 676 goods were taken keeping 2004-05 as the base year. It is available on a weekly basis with the shortest possible time lag of only two weeks.

Consumer Price Index CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one. Since, it is measured at retail prices, it gives a proper picture of inflation and its resultant effect on the consumers. Of the various CPIs estimated in India, the most important one is CPI-IW. This estimates the cost of living for the industrial workers in the country. The coverage of this measure, though not as that of WPI, it is broader than the other CPI indices.

Inflation in India (Monthly- 2010)Month January February March April May June July August September October WPI134.8 134.8 135.8 138.3 138.8 139.4 140.6 140.7 141.5 141.7

CPI-IW172 170 170 170 172 174 178 178 179 181

Inflation % (WPI)8.53% 9.68% 10.23% 11.00% 10.60% 10.28% 10.02% 8.82% 8.93% 8.58%

Inflation % (CPI-IW)16.22% 14.86% 14.86% 13.33% 13.91% 13.73% 11.25% 9.88% 9.82% 9.70%

Inflation: WPI vs. CPI-IW

Why is WPI considered over CPI-IW by the Govt. of India? WPI is available with the weekly frequency of releases as against the monthly frequency of CPI-IW. WPI is released with a smaller lag of a fortnight. On the other hand, lag in CPI-IW is one month. WPI is computed on an all India basis, whereas CPI-IW is just constructed for specific centres and then aggregated to obtain the all India index. Though services come under the ambit of WPI, the coverage of non-agriculture product is better in WPI than CPI. The coverage of tradable items, mainly manufactured products, is higher in the case of WPI. Wider coverage of commodities makes WPI less volatile to relative price changes as compared to the CPI-IW.

Why CPI over WPI? Limitations of WPI are non-inclusion of services use of gross transactions data rather than data on final purchases

The CPI-IW captures the price increase in the service sector as it takes into account the prices for end consumer. Also, the weightage of food items in CPI is more than that in WPI that gives more clear picture of burden on common people.

Impact of Hike in Fuel Prices Not much impact on WPI as it does not consider service charges like transport costs, which is the main area that is affected by fuel prices. On the other hand, there is greater impact on CPI, as apart from the changes in fuel prices, it also takes into account the rise in food and other prices due to the increase in transport costs.

ConclusionHaving discussed the reasons for considering WPI in the Indian scenario and the advantages of CPI over WPI, we can conclude that with a large component of India s aggregate income being generated through services, CPI gives a clearer picture of inflation and its impact on the AAM AADMI , i.e., the end consumers.