Inflation: stranger than fiction
One has heard of science fiction. It is time to notice the growing volume of economic and statistical fiction
The erstwhile chief economic advisor to the PM expressed displeasure: the Wholesale Price Index (WPI) was eroding the credibility of official statistics in India. The reason was eminently sensible: government data showed inflation to be declining while everyone in the market has to fork out more money to buy the same amount of goods.
This divergence of real life experience from the weekly publicised data is so stark that no sophistry of economic theory or complicated statistical procedures can either camouflage or defend it. Recent trends in market prices of agricultural products soaring well ahead of the estimated fall in production, following widespread drought, makes a mockery of the WPI which shows inflation in the negative! Such fictional data are not new.
Everyone from planners to the PM to liberalisation propagandists went gaga about attaining what they called the second highest rate of development of the Indian economy till the global recession played spoilsport. This is a far more serious statistical lie. Over three-fourth of India knows the truth of development - their condition remains either unchanged or is worsening. But it is some satisfaction that at least some facts, like the unreality of WPI, are being acknowledged.
Prices are a serious issue. Most Indians are price-takers. They neither fix the price of goods or services nor do their economic decisions carry enough weight to make any difference to prices. To these passive price-takers, the prices they are made to pay in the market are important as their meagre nominal incomes are both sticky and uncertain. Only a miniscule minority of Indians are either investors buying in bulk or big traders who build up inventories.
Thus, wholesale prices matter to the masses as they are the base over which mark-ups are added at the retail level. Since most of them are neither investors setting up plants or buying machinery, instruments, equipment, raw materials, components, or other intermediate goods or merchandise for further sale, for an overwhelming majority of Indians wholesale prices are a distant entity.
One has heard of science fiction. It is time to notice the growing volume of economic and statistical fiction, in quantitative terms. WPI is an important part of economic fiction. A new instalment of the WPI served every week has become an addiction for the media. WPI is a misleading indicator of what India is doing with inflation, real income, real rate of interest, real wages and such critical variables.
Will there be a revamp of price collection, computation and index computing exercises? It is imperative that for many purposes, such as to finding out the real rate of interest, consumer price indices should be used. Reason: it is the household sector that makes most consumption expenditure and makes savings. Clearly, for a paradigm shift, ideological and economic biases of neo-liberal origins have to be discarded.