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Thursday, July 13, 2006

Inflation: Is WPI fallible?

The textbooks define Inflation as a situation where too much money chases too few goods i.e. the purchasing power of money has decreased. Actually, only an increase in the general price level for a considerable period of time is called as Inflation in Economics. The 2 major causes are Demand pull factors and Cost push factors. The present reason for inflation to increase is owing to the increase in the global prices of oil which comes under cost push factors.

What is the WPI?
Wholesale price index or WPI is the measure for inflation in India. The government comes out with WPI inflation figures every Friday. The WPI presently consists of 435 items and it is dominated by manufactured goods which make up 63.75% of the index.

Current scenario
In 2005-06 inflation has been experiencing a free fall in spite of escalating crude prices.
Currently the inflation rate is about 4.6% which is clearly undervalued as when compared to the increases in the prices of goods and services. The prices of pulses, transportation has all increased considerably but the WPI does not seem affected much.

Components of WPI
In the computation of WPI, the 3 major variables are Primary articles (weight 22.0), Fuel, power, light and lubricants (weight 14.2) and manufactured products (weight 63.7). Manufactured products have always enjoyed more weight in the calculation of WPI.

Cause of worry
One reason is that, the prices of commodities are increasing due to the increased costs, mainly in transportation. But there has been no corresponding increase in wages. The people who are poor will find it difficult to live as they were living before the price hike.
The second is that, the retailers take advantage of this situation by hoarding up commodities, further fuelling inflation. And the third reason is that, services do not form a part of the WPI though its share in the GDP is 52%. Surprisingly, the WPI inflation rates are just hovering between 4.5% and 5%, which tells us not to worry. History has told us to take inflation rates seriously only if the rate crosses 8%.

Government reaction
The government has decided to reduce customs duties on imports of wheat and sugar in order to increase the domestic supply. The government wants to reduce inflationary pressures by mopping up the excess demand in the economy.

A paradox
Like mentioned in the beginning of this article, the current cause of inflation is an increase in the global oil prices which is a cost push factor. How can the government be so blind in not seeing this? Instead it has gone to the extent of giving duty free imports to reduce excess demand in the economy, when there has been no excess demand!

Remedy
The immediate step to take will be the reconstruction of the WPI so that it indicates the genuine level of inflation. Like our outdated poverty line, which tells that only about 26% of the Indian population is poor, the current WPI is also outdated.


References
1)http:/indiabudget.nic.in
2)http://economictimes.indiatimes.com/articleshow/1502544.cms
3)http://www.flonnet.com/stories/20060714001704800.htm

8 comments:

aashish said...

just shows how our government manipulates statistics to protect itself. first the poverty line, then the literacy rate, and now this.
this is ridiculous.

Anonymous said...

http://greenbuck.blogspot.com/2006/08/inflation-revisited.html

Anonymous said...

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arvind said...

THIS IS MAIN REASON IS THAT THE INDIAN GOVT HAS BEEN IMPORT OF THE COMMODITY IN ABROD SO THAT THE WHOLE SALE PRICE ALSO AFFECT BY THIS SITUATION.

Nishid said...

Hi friendz, i am an mba student and i have to give a presentation on "Calculation of Inflation in India". Would be grateful if anyone could help me out on this......thanx.....

carthy said...

Each and every statement that congress makes is a perfect paradox and will let you fall into deepest of limbos. LOL. First, to reduce food price hike's effects, even an uneducated commoner would suggest to increase the Local production to meet its urgent demand then and there near the demand center in order to avoid transportation costs and delivery delay but our intelligent and so called "modernized" congress had suggested to decrease the excise duties in order to encourage more import of food grains including wheat when we are wasting colossal amounts of Wheat due to the lack of proper storage facilities and amidst of all this comes our very responsible and venerable agriculture minister Mr. Sharad Pawar, who genuinely believes that this problems with Agriculture production's steep fall, internal food price hike, scanty monsoon rain and relative danger that food front of India face as much less severe than the problems we face with cricket and its management so he had requested Mr. Prime Minister to reduce his work burden as an agricultural minister since he wants to divert is entire attention in developing cricket. Not to mention that the interest he shows in cricket brings in a lot of suspicion but the idea of ignoring agriculture for the sake of cricket lacks ingenuity and is a lot derisory.

Anonymous said...

well said Carthy !!!

but these politicians are very thick skinned !!!

the sharp edge of an imminent revolution can skin them !!!

mcx tips said...

I think so. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction.The Wholesale Price Index or WPI is the price of a representative basket of wholesale goods. This helps in analyzing both macroeconomic and microeconomic conditions.The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index.Some countries use the changes in this index to measure inflation in their economies, in particular India – The Indian WPI figure is released weekly on every thursday and influences stock and fixed price markets.
Thank you,
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