New price index plan to raise the heat

NEW DELHI: It is not just the UPA government���s ineffectual handling of runaway inflation that is proving to be a political millstone. It now appears that the government is likely to come under attack for its continued use of a flawed measure for inflation, one that hardly reflects the ground reality.

Concerned that inflation, as experienced by the consumer, has reached double-digit figures instead of 7.41% calculated on the basis of wholesale prices, the multiparty Parliamentary standing Committee on Finance headed by BJP leader Ananth Kumar is expected to put the government in the dock over the inordinate delay in implementing revised price indices. A delay could be showing a lower level of inflation than one consumers are experiencing.

It isn���t that the UPA government isn���t aware of the need to revise the wholesale price index (WPI). The current WPI measures headline inflation, and as such it doesn���t provide an accurate measure of the price rise that consumers face at the retail level. For three years now, the government has been working on an initiative to recast WPI.

In 2005, the government set up a taskforce headed by economist and planning commission member Abhijit Sen to review and update the WPI. Broadly, the Committee has suggested updating the base year for measuring the wholesale prices, increase the number of commodities, and make changes in the weightages given to different commodities.

A revised WPI is expected to provide a more accurate measure of inflation. However, it is felt that the government may be holding back the index for precisely this reason. The Standing Committee is expected to put pressure on the government to ensure that a more accurate index is used for measuring inflation. Initially, the Committee had suggested 2000-02 as the base year and now it appears that the Committee has now recommended 2004-05 as the base year. The current index uses 1993-94 as the base year. It has also suggested doubling the number of the commodities and articles considered for calculating the WPI from the current level of 435.

Changes in weightages is expected to reflect the changes in output and price patterns. For instance, the weightage for sugar in the WPI could well go down to anywhere between 1%and 2%. This will mean that whenever there is a tight supply in sugar and prices shoot up at home, it won't immediately be read as a making a high contribution to a possible spike in inflation. On the other hand, weightage for the fuel group is expected to go up from the present 14.23 per cent. A higher weightage would mean that increased fuel prices would be accurately reflected in the index.