Indian Economy Quick facts: Ninth largest in the world in the world by nominal GDP. One of the G 20 major economies. 6.9% GDP growth rate is the minimum in the previous two years One of the fastest growing economies in the world- expected growth rate to be around 7.5 % 7th largest exporter and 11th largest importer in the world.
Inflation a view: Highest so far 34.68 percent in September of 1974 Lowest recorded -11.31 percent in May of 1976. In November 2011, the inflation was 9.11%. Food inflation by recent estimates is at 4.38% i.e. at a four year low.
Price indices In economic scenario there are constant changes and movement in prices. These changes greatly influence the buying and selling decisions of consumers, and thus the economic scenario. Producer price index Wholesale price index Consumer price index
What Is Wholesale Price Index(WPI)? Wholesale Price Index (WPI) is a price index which represents the wholesale prices of a basket of goods over time. Advantages of WPI: WPI has been in use in India since many years so the calculation is fairly easy. It has over time developed and taken into its circle few of the important factors that need to be considered. WPI measures inflation at each stage of production. WPI is the basis for the economic deflation rate.
Disadvantages of WPI: WPI is said to give lots of erroneous results. It ignores the service expenses etc which are more dominant expenses today. It gives the view till the level of the wholesaler. India is a country with diverse consumer behavior. It is hence not justified to use wholesale rate. The true inflation rate in the economy is not disclosed. There are a lot of insignificant goods that are considered in WPI like fodder given to cattle etc. These goods do not construe a high percentage of the income and expense today.
What Is Consumer Price Index(CPI)? Consumer Price Index (CPI) is a price index which represents the average price of a basket of goods over time. It is followed by a majority of the countries. Advantages: The CPI measures inflation only at final stage of production. It is more reliable as compared to the WPI. It includes the service sector etc which form a major part of expenses and income these days. Unnecessary articles do not form a part of CPI. The price prevailing in the lowest level is considered thus a true picture of inflation is given.
Disadvantages: The calculation of CPI is a very rigid task. It has a lot of information to be calculated. Right now in India it is calculated by only a limited number of organizations the reliability of whose data is not guaranteed. Some of the aspects covered under CPI are too difficult to account for.
Why is India still following WPI? The size of India in terms of population, land mass and diversity makes it difficult to make the changes. Political reasons Multiple formulas for calculating CPI in terms of India. CPI figures are available on monthly basis while WPI is calculated on a weekly basis The lag time of WPI is lesser than that of the CPI. The source of WPI is more trustable.
Factors leading to development ofCPI First used by America, post first world war. During Second World War commodities became scarce and goods had to be rationed, the index weights had to be adjusted temporarily to show these shortages. Changing trends in consumption behavior. Changes in societal structure.
Why are other countries followingCPI? The changing consumption habits of the consumers. The spread of consumerism and the popularization of service industry like restaurants. The world war led to a change in societal structure. Females started to join work force as men left for war. As European countries started adopting it most other nations started adopting it. The CPI was created to offer people, businesses, and government knowledge of the costs of inflation. It covers food, beverages and other things which are not covered under other similar indexes.
Why India is not followingconsumer price index? The CPI is widely used as a cost of living index, but technically it is not. The CPI completely ignores important changes in taxes, health care, water and air quality, crime levels, consumer safety, and educational quality. Major hurdles in adopting Consumer Price Index- Treatment of seasonal commodities. Substitution bias New Outlet Bias Time of Month Bias Introduction of New Product Measuring of complex services are generally neglected.
Why India should go for ConsumerPrice Index? Preference over the CPI is often explained in terms of three criteria – National coverage Timeliness of release (now only limited to food products) And availability in a disaggregate format
Report by CSO- The CSO released the new CPI with base year 2010 (Jan- Dec=100) on 18 February this year. Some features of the new CPI series are the following: The new CPI is disaggregated at the rural and urban level. The new series has a better geographical as well as commodity coverage than the earlier series.
The weights have been derived from the 61st round of the NSS consumer expenditure survey (2004-05). Data for the urban CPI numbers will be collected from 310 towns (compared to 78 in the current CPI-IW, for all India) whereas for rural CPI numbers, 1,181 villages have been selected broadly on patterns of population distribution. The basket of consumer goods in the new CPI has also risen from 25 to 250. The new CPI will cover the entire population and not a specific group like industrial workers. In addition, the weights in the new CPI are taken from a recent consumer survey.