The trigger for all for all this is what the industry ministry releases every Friday. Yes, we are talking about the Wholesale Price Index (WPI) changes published by the industry ministry by early afternoon every Friday. In India, the most widely followed inflation indicator is the Wholesale Price Index. There are several other indices, including a few that capture retail prices. But it is the Wholesale Price Index that influences policy debates among economists and determines how the government and the Reserve Bank of India (RBI) should respond to the challenges of keeping prices under control.
Worse, ever since the WPI-based inflation rate crossed the five per cent mark (the level with which the RBI is comfortable), Fridays have invariably seen a fresh bear attack on the stock prices, the government offering hope that the inflation rate would soon come down and the economists predicting how soon the RBI would react with further tightening of the monetary policy. Not surprisingly, officials in the industry ministry have been forced to review the exercise that results in the publication of the WPI numbers every Friday.
The first outcome has been the discovery (this received wide publicity as well) of the fact that the WPI data, based on which the inflation rates are computed, are hopelessly incomplete and inadequate. The latest price data for a large number of items are not updated for several weeks and are revised much later. Thus, while the latest inflation rate may look benign, the revised figure that comes a month or two later shows that the inflation rate has actually been much higher than originally estimated. The cleaning up task has begun but the authenticity of the inflation data continues to be a cause for concern.
The second outcome has been a proposal that questions the logic of releasing the WPI numbers every week. Economists within and outside the government have wondered about the need for a weekly update of the WPI numbers. There have even been suggestions that no other country has this practice of releasing inflation data every week. So, why should India be the only country indulging in such self-flagellation every week? Of course, nobody can deny that this idea was floated only when the weekly release of the inflation numbers became an embarrassment for the United Progressive Alliance (UPA) government. And this gave credence to the widely-held view that no economic logic, but the desire to bail the government out of a politically difficult situation was the reason behind the proposal.
The third outcome has been a proposal, mooted by influential economists, to divest the industry ministry of the responsibility of compiling the WPI data. The government is not known for its efficiency in collecting data. In the past, the responsibility of collecting data for industrial production also has been outsourced to private agencies. So, why not let the wholesale prices data be collected by the RBI or an agency to be nominated by the central bank? Let the RBI take the responsibility for collecting and processing the inflation data and then formulate the measures to ensure stability in prices.
There is no doubt that the UPA government will soon come out with a new regime for collection of inflation data. Vesting the RBI with the responsibility of collecting and processing the WPI data makes sense as the central bank will do a far better and a more complete job. Robust price data will be a major gain for the country.
Till 1998, the finance ministry had the sole responsibility of running all the mints and the currency printing presses. But by 1999, the responsibility of running two of the four currency printing presses was handed over to a company floated by the RBI.
It's true that running currency printing presses is completely different from WPI data collection. But if the RBI can efficiently run two currency printing presses, why can't it also manage the country's inflation data?
Inflation: The silent killer!