What is inflation?
Inflation is a general increase in the price of products and services with the fall in the purchasing value of money. It is an important factor to assess the economy of any nation.
How inflation is calculated in India?
In India inflation is calculated by using the Wholesale Price Index (WPI). But this system is considered backward as compared to the Consumer Price Index (CPI), a method that is used by the developed countries to calculate inflation.
The Wholesale Price Index or WPI is the price of certain wholesale goods. Any change in this index, points towards inflation. Earlier WPI figures used to be released on every Thursday but now these figures are updated on monthly basis. The main focus is on goods traded between corporations. These figures affect the stock exchange and fixed price market in India.
Different commodities for calculating WPI are chosen on the basis of their importance in a region. Then the wholesale price of these commodities is taken up to calculate the Wholesale Price Index. In1993-94 there were 435 items but at present there are about 676 items in the list of WPI.
In India, there are three groups of Wholesale Price Index
- Primary Articles (20.1 percent of total weight),
- Fuel and Power (14.9 percent) and
- Manufactured Products (65 percent).
What leads to inflation?
Inflation is also determined by demand and supply factor. Inflation is accelerated in case demand is more than supply. India has the capacity to produce 550 units of major commodities but the demand for the same is 700 units. If both demand and supply are considered, then supply is more important from inflation point of view.
India is basically an agrarian country where grains are produced in an enormous quantity. But lack of proper storage facilities and their damage in transit lead to the scarcity of food grains. Production cost is also high as the cost of labour is more. All this results in low supply leading to inflation.
Domestic factors like under developed economies because of lesser developed financial market also cause inflation.
Inflation in India is also affected by the exchange rate. When the price of goods in United States of America increases, inflation in India increases as commodities are imported at a higher price.
In May 2013 the inflation rate in India was 4.70%, in July it was 4.86% and in August inflation rate was 5.79%.
Why India is not using advance method of calculating inflation?
Economists V Shunmugam and D G Prasad who are working with India's largest commodity bourse -- the Multi Commodity Exchange argued that government should immediately shift to another method of calculating inflation as present method has many flaws. Many commodities that are not even used by the end consumer are used to calculate inflation in WPI.
But demographic and structure of India does not allow it to use the advance method. Consumer Price Index in India is difficult to adopt as four types of CPI indices are there in India:
- CPI Industrial Workers
- CPI Urban Non-Manual Employees
- CPI Agricultural labourers
- CPI Rural labour
