The Truth About Inflation

While the WPI-based inflation has all commodities—including capital goods—in its fold, what matters to the commoner is the cost of living. The consumer price index (CPI)—which is a better indicator of the effect on the consumer’s basket of goods—continues to be high. Calculated separately for industrial workers, urban non-manual employees, and farm labourers, it shows an inflation rate still hovering around 10 per cent. In fact, "for farm labourers, who constitute the bulk of the population and in whose basket of goods, food accounts for a major chunk, inflation is close to 13 per cent," remarks Jay Dubashi, convenor of the economic cell,Bharatiya Janata Party. In any case, a drop in inflation rate, as in the case of WPI, does not suggest falling prices. Inflation is the rate of change in price. A lower inflation, as long as it is positive, means that prices are rising at a slower rate. Rising, nevertheless. "Nowhere in the world are prices falling, except during great depressions," comments Omkar Goswami, associate professor, Indian Statistical Institute.

Yet, prices, to a very huge extent, remain symbolic to the electorate of how the Government is performing. The Rao administration, neck-deep in an election year, is aware of the mood swings prices alone can cause. Wiser by the defeat in four states last year, it is trying to tame inflation by clamping down on the money supply flowing into the economy. "The Government wants to bring down inflation to 5-6 per cent, to be able to claim that it is one-third of what it was five years ago," says Dubashi.

But as the Government flaunts a lower WPI, is industrial growth being sacrificed at the altar of pre election moves? "The only way to curb inflation is by reducing the budget deficit which the Government has failed to do. Now, it is trying to do through its monetary policy what it couldn’t do through the fiscal," says Dubashi. The Government’s decision to turn stingy on money supply—at a time when forex inflow is also slowing—is adding to the woes of a cash-strapped industry, which is already paying a higher cost for funds because of a sluggish stock-market. Having run at a healthy rate through the year, industrial growth is showing signs of wearing off. "Interest rates have gone up by 3-4 per cent since March. It is now impossible for businesspeople to borrow at below 22-25 per cent from the banks," adds Dubashi.

The Index of Industrial Production (IIP), up by 11.3 per cent in the first quarter of the year, according to the Centre for Monitoring Indian Economy (CMIE), "is expected to average 9-10 per cent only for the year," says Shashanka Bhide, director, National Council of Applied Economic Research. The liquidity crunch industry has had to contend with in the last four months shall worsen still. "In the next six months, the effect of the tight monetary policy will definitely show up, especially in the capital goods sector," adds Bhide. "A closer look at the industrial growth figures reveals that capital goods and basic industries are growing at a much slower pace than the consumer durables and non-durables industries," says S.K. Goyal, director, Institute for Studies in Industrial Development (ISID) (see chart; data collated from 500 companies by ISID with April-June 1991 as base).

The macro figures hide more than reveal. "The limitation of these indices is that they give a general idea and not specific information. The consumption basket of different people is different, and the inflation figures do not tell how the different groups get affected," points out Goyal. Whether we are talking about the rural poor, the rural rich, the urban poor, or the super rich, makes all the difference. V.R. Panchamukhi, director, Research and Information System for the Non-Aligned and Other Developing Countries, suggests that it may become necessary to have are tail price index series for different regions to account for the disparities in the prices and baskets of goods. "In a large country like ours, the aggregated kind of index we work with may not truly reflect the trend or give the right insight into what needs to be done to deal with the situation," says he.

Consider the micro figures in another way: the price of essentials is increasing at a faster rate than that of non-essentials. "The rise is sharper for essential food articles over non-essential food articles; for durable goods for the common man than for durable goods for the upper and middle classes; for gur and khandsari than for sugar; for utensils than for crockery; for tooth powder than for toothpaste," says Goyal. But this trend existed pre-1991 too. "One can’t avoid it. Since the demand for essentials is price-inelastic, the rise in prices is sharper. However, the Government could have assuaged the effect, had it invested in the common man," adds Goyal. The rich and the poor stand distanced even more.

Statistics do not lie but, if seen out of context, can mislead. "The inflation data uses point-to-point observations (that is, compare two figures separated from each other by a year). Instead, one should be looking at a 52-week period to plot the trend, after the data is deseasonalised (there are strong seasonal elements which can be adjusted)," says Goswami. In case of point-to-point observations, the change over the previous year can vary drastically, depending on the two points one chooses to take, leaving much scope for manipulation.

Worse still, the WPI uses commodity weights (assigned according to share in total value of out put) decided upon in 1981-82. "After 14 years we are using the same weights although the structure of production in the country has changed—certain items have become more important and some less," says Goswami. Despite a committee having been set up under Y.K. Alagh for making a new—more representative—weighting diagram, nothing has been done so far. With the base year for the index for industrial workers at 1982 and that for agricultural labourers at 1960-61, the CPI is even more backdated.

There’s more. The official data has the inflation rate calculated by comparing the current provisional figure with the final figure (instead of the provisional) last year. The final figures are normally higher than the corresponding provisional figures, thus you end up with a lower inflation rate. Take, for instance, the inflation rate calculated by CMIE, for the second week of September: the ‘provisional over final’ figure at 8.37 per cent is much lower than the ‘provisional over provisional’ at 9.01 per cent. "There is normally a lag of one percentage point," says Dubashi. Which means the final figure for the inflation rate, said to be about 6.7 per cent for the week ended December 16, may be about 7.5 per cent.

Still reasonably low. "India has gone through a limited reforms programme but with much lower inflation rates than some other countries," defends Goswami. True. Many countries have experienced galloping rates during structural adjustment. For instance, China, which saw a 20 per cent growth rate in 1993 found itself in an explosive boom-bust situation with inflation soaring as high as 30 per cent. It is now down to around 12 per cent. Till now, the Rao Government has been concentrating on keeping inflation low, at the cost of industrial growth. But, says Panchamukhi,"It is advisable that the tight monetary policy be eased by March."

In the meantime, which way is the CPI, the common man’s index, expected to move? There is said to be a lag between the CPI and WPI-based inflation rates. "The WPI trend is generally reflected in the CPI after a lag of about three months," says Amaresh Bagchi, former director, National Institute of Public Finance & Policy. "The CPI is expected to come down from 10 per cent, but only to go up again. The Government has not raised the administered prices this year, but next year it will definitely have to. The budget deficit is swelling. So, the inflation rate at 7-8 per cent is not likely to last long," warns Bhide. And if the deadline of the one-digit inflation spell brushes with that of the elections, no one is going to call it a coincidence.