4. CPI-RL

There is yet another Consumer Price Index for the Rural Labourers (CPI-RL) with 1983 as the base year, data is collected at 600 villages on monthly frequency with three weeks time lag, its basket contains 260 commodities.

The agricultural and rural labourers in India create an overlap, i.e., the same labourers work as the rural labourers once the farm sector has either low or no employment scope. Probably, due to this reason this index was dropped by the government in 2001–02.45 But after the government change at the Centre the index was revived again.46‌

Revision in the CPI

It was in 2011 that the government announced a new Consumer Price Index (CPI) – CPI (Rural); CPI (Urban) and by combining them into a ‘national’ CPI-C (where ‘C’ stands for ‘Combined’). Menawhile, the data for the existing four CPIs were also being published by the CSO. The base year was also revised from the existing 2004–05 to 2010–11.

In February 2015, the CPI was again revised by the CSO. Together with changing the base year, in this revision, many methodological changes have been incorporated, in order to make the indices more robust. The major changes introduced in the revised series are as given below:

1. The base year has been changed from 2010=100 to 2012=100.

2. The basket of items and their weighing diagrams have been prepared using the Modified Mixed Reference Period (MMRP) data of Consumer Expenditure Survey (CES), 2011–12, of the 68th Round of National Sample Survey (NSS). This has been done to make it consistent with the

international practice of shorter reference period for most of the food items and longer reference period for the items of infrequent consumption. The weighing diagrams of old series of CPI were based on the Uniform Reference Period (URP) data of CES, 2004–05, of the 61st Round of NSS.

With this change in the weighing diagrams, the gap between Weight Reference Year and Price Reference Year (Base Year), which was six years in the old series, has now been reduced to six months only. Due to change in the consumption pattern from 2004–05 to 2011–12, the weighing diagrams (share of expenditure to total expenditure) have changed. A comparison of weighing diagrams of the old and revised series is given below:

Comparison of weighing diagrams of the existing and revised series of CPI

Source: CSO, February 2015. Here, ‘Combd.’ stands for Combined while ‘-’ stands for ‘not available’.

3. The number of Groups, which was five in the old series, has now been increased to six. ‘Pan, tobacco and intoxicants’, which was a Sub-group under the group ‘Food, beverages and tobacco’, has now been made as a separate group. Accordingly, the group ‘Food, beverages and tobacco’ has been changed to ‘Food and beverages’.

4. Egg, which was part of the sub-group ‘Egg, fish and meat’ in the old series, has now been made as a separate sub-group. Accordingly, the earlier sub-group has been modified as ‘Meat and fish’.

5. The elementary/item indices are now being computed using Geometric

Mean (GM) of the Price Relatives of Current Prices with respect to Base Prices of different markets in consonance with the international practice. In the old series, Arithmetic Mean (AM) was used for that purpose. The advantage of using GM is that it moderates the volatility of the indices as GM is less affected by extreme values.

6. Prices of PDS items under Antyodaya Anna Yojana (AAY) have also been included for compilation of indices of PDS items, in addition to Above Poverty Line (APL) and Below Poverty Line (BPL) prices being taken in the old series.

7. Sample size for collection of house rent data for compilation of House Rent Index, which was 6,684 rented dwellings in the old series, has now been doubled to 13,368 rented dwellings in the revised series.

8. Apart from All-India CPIs (Rural, Urban, Combined) for sub-group, group and general index (all-groups), which were released for the old series, all India Item CPIs (Combined) will also be available.

9. The Consumer Food Price Indices (Rural, Urban, Combined) will be compiled as weighted average of the indices of following sub-groups, as practiced earlier in the old series (only the weights have been revised):

All India Weights of different Sub-groups within Consumer Food Price Index

Source: CSO, February 2015. Here, CPFI stands for Consumer Food Price Index.

Trends in Inflation

Inflation has been a highly sensitive issue in India right since Independence and it has been so during the ongoing reforms process period, too. It has an incessant tendency of resulting into ‘double digits’, taking politically explosive proportions like governments falling at the Centre and state levels due to price rise of the commodities such as edible oil, onion, potato, etc. In such situations the government in general has been taking recourse to tighter money supply to contain the state level disturbances due to price rise of the commodities such as edible oil, onion, potato, etc., although it has contained inflation, but at the cost of higher growth. Price rise got rooted in India’s political psyche in such a way that the government did check frequent famines quickly at the cost of long-term endemic hunger and sustained malnutrition.47

Decadal inflation in India looks comparatively normal with reference to many developing economies.48 But it has sporadic incidences of double-digit tendencies mainly due to supply-side shortfalls caused by droughts (monsoon failures), price rise of crude oil in the international market or fund diversions due to wars (the Chinese war of 1962 and the Pakistan wars of 1965–66 and 1971). The decadal inflation in India has been as given below:49‌

(i) During 1950s: remained at 1.7 per cent.

(ii) During 1960s: remained at 6.4 per cent.

(iii) During 1970s: remained at 9.0 per cent.

(iv) During 1980s: remained at 8.0 per cent.

(v) During 1990s: remained at 9.5 per cent (though it reached 0.5 per cent by the fourth quarter of the fiscal 1998–99)

(vi) During 2000s: Inflation was at lower levels between 2000–08 (from 3 to 5 per cent). But from 2009 onwards it started moving upward with ‘sttuborn’ tendencies.50 Between 2009–13, the headline inflation remained stuck at uncomfortable levels, primarily due to ‘food articles’ (food inflation) led by protein-rich items (protein inflation) in the consequence of shift in dietary habit, income effect (via MGNREGA kind of schemes), increased wages, increase in prices of commodities in

the global market (especially, food articles), costlier fodder, costlier energy and fuel, etc. By late 2010, India had the phenomenon of ‘skewflation’ with inflation being in the range of 9–10 per cent.

(vii) During 2010s: From 2010–11 to 2013–14 inflation remained higher— the average inflation at WPI and CPI was 8 per cent and 9.7 per cent, respectively. Food inflation, led by protein items, breached into double digit51. Since mid-2014 inflation started moderating—WPI inflation remained in negative (-5.1 per cent by August 2015) and CPI inflation positive of 4.9 per cent end-December 2016)—showing a ‘wedge’ of 10 per cent. During 2016-17, inflation has been characterized by the following features, as per the Economic Survey 2016-17:

(a) CPI inflation moderated to 3.4 per cent by December 2016 (due to good kharif crops led by pulses).

(b) WPI inflation reversed from negative to a positive of 3.4 per cent by December 2016 (due to rising international oil prices).

(c) The wedge between CPI and WPI inflation, seen in 2015-16 has narrowed down to zero.

(d) Core inflation has been more stable—hovering between 4.5 to 5.0 per cent.

(e) The outlook for the headline inflation (i.e., CPI-C) for 2016-17 is below the RBI’s target of 5 per cent (a trend likely to be assisted by ‘demonetisation’).

An analysis of inflationary trends in India does not pin-point any one reason behind it. Economists have pointed out all possible reasons (the so- called ‘good’ and ‘bad’) behind the inflationary pressures in the economy of which we may have a brief review:

1. Structural Inflation

With few exceptional years, India has been facing the typical problem of bottleneck inflation (i.e., structural inflation) which arises out of shortfalls in the supply of goods, a general crisis of a developing economy, rising demand but lack of investible capital to produce the required level of goods.52

Whenever the government managed to go for higher growths by managing higher investible capital it had inflationary pressures on the economy (seen during 1970s and 1980s, especially) and growth was sacrificed at the altar of lower inflation (which was politically more justified).53 Thus, the supply- side mismatch remained a long-drawn problem in India for higher inflation. After some time even if the government managed higher expenditure, most of it went to the non-developmental areas, which did show low growth with higher inflation—signs of a stagnating economy.

2. Cost-Push Inflation

Due to ‘inflation tax’ the price of goods and services in India have been rising as the government took alternative recourse to increase its revenue receipts.54 We see it taking place due to higher import duties on raw materials also.55 The non-value-added tax (non-VAT) structure of India in the past was also having cascading effect on the prices of commodities in the country.56 The government needed higher revenues to finance its planned development, thus the above given factors looked inescapable.‌‌

3. Fiscal Policy

To finance the developmental requirements of the economy, the governments became trapped in the cyclical process of over-money supply. At first it was done by external borrowings, but by the late 1960s onwards (once deficit financing got acceptance around the world) the government started taking recourse to heavy internal borrowings as well as printing of fresh currency too. A major part of the government’s internal borrowing is contributed by the Reserve Bank of India (RBI) which leads to price rise.57 For any government deficit if the Central Bank (RBI) is purchasing primary issues of the Government securities or creating fresh advances to the government, the combined effect has to be higher inflation, lower savings rates and lower economic growth58—the vices of unsound fiscal policy. The higher fiscal deficit tends to bring about higher interest rates as demand for funds rise, excess demand raises expected inflation and expected depreciation of the‌

currency.59 Once the foreign exchange (Forex) reserves started increasing with a faster pace by the early 2000–01 fiscal, its cost of maintenance has been translated into higher prices, as the RBI purchases the foreign currencies it supplies into equivalent rupees into the economy, which creates extra demand and the prices go up.60‌

The higher revenue deficits (driven by high interest payments, subsidies, salaries and pensions, basically) and fiscal deficits make the government supply more money which push the inflation in the upward direction. Once the Fiscal and Budget Management Act came into force in 2003, the scenario improved in the coming times. Though the period from 1999 to 2003 did show high growth with low inflation and the lowest interest rates in India.

Healthy Range of Inflation

Higher inflation and higher growth as a

trade-off was questioned in the late-1980s by the developed economies as the economic and social costs of higher inflation also needed policy attention—a costly ‘trade-off’.61 In coming times, most of the world economies went in favour of a stable inflation (i.e., inflation targeting) though the idea has been protested.62 India also started inflation stabilisation (informed targeting at WPI) by the early 1970s. It was in 1973 that inflation crossed the 20 per cent mark on account of the international oil price rise and the government (the Indira Gandhi Government) devised a severe anti-inflation package which included directly restricting the disposable incomes of the people (this measure was used for the first time in India63). The package had an impact and by March 1975 the inflation calmed down to 5.7 per cent. This was the time when the RBI was given a new function ‘inflation stabilisation’ and India entered the era of monetary controls for inflation. With inflation targeting there started a debate concerning the healthy range of inflation for the Indian economy, i.e., by mid-1970s. We may have some official and non- official versions of the suitable range of inflation pointed out from time to time:‌‌

(i) The Chakravarty Committee (1985) treated 4 per cent inflation as acceptable for the economy in its report on the monetary system. He also

added that this level of price rise will facilitate the purpose of attracting investment for the desired level of growth.

(ii) The Government of India accepted a range of 4 to 6 per cent inflation as acceptable for the economy citing the world average of 0 to 3 per cent at the time (1997–98).64

(iii) The RBI Governor C. Rangarajan advocated that inflation rate must come down initially to 6 to 7 per cent and eventually to 5 to 6 per cent on an average over the years.65

(iv) The Tarapore Committee on Capital Account Convertibility recommended an acceptable range of 3 to 5 per cent inflation for the three year period (1997–98 to 1999–2000).66

In the recent times (June 2003 onwards) the government/the RBI has maintained a general policy of keeping inflation below 5 per cent mark—at any cost—as if fixing 4 to 5 per cent as the healthy range of inflation for the economy.67

The medium-term objective (i.e., target) of the government is to keep inflation in the 4–4.5 per cent range.68 One thing should be kept in mind that inflation has always been a political matter in the country. Every time the RBI tried to check the rising inflation via monetary measures a majority of experts objected to it by calling it a move to sacrifice growth for lower price levels. A tighter monetary policy decelerates investment and growth, hampers the growth prospects of the middle class in general and the entrepreneurs in particular while the wage-earners as well as the poor segment of society feels relieved (at least in short term).

In February 2015, India formally commenced the process of ‘inflation targeting’. Now, the new monthly CPI (C), is taken as the measure of headline inflation and is tracked by the RBI to anchor its monetary policy and the healthy annual range for it is between 2 to 6 per cent.

Producer Price Index

A working group was set up in mid-2003–04 under the chairmanship of Prof. Abhijit Sen, Member, Planning Commission to fulfil the twin tasks of:

(i) revising the current series of WPI (i.e., base 1993–94) and

(ii) recommending a producer price index (PPI) for India which could replace the WPI.

As follow-up to its advices, the new series (base year) for the WPI has been revised to 2004–05.

The proposal of switching over to the PPI (from the WPI) came up from the government by mid-2003 and the working group has been getting inputs from the IMF regarding it. The PPI measures price changes from the perspective of the producer while the consumer price index (CPI) measures it from the consumers’ perspective. Wholesellers charge higher prices to retailers, in turn retailers charge higher prices to consumers and the price increase is translated into the higher consumer prices—thus the PPI is useful in having an idea of the consumer prices in the future.69 In PPI, only basic prices are used while taxes, trade margins and transport costs are excluded. This index is considered a better measure of inflation as price changes at primary and intermediate stages can be tracked before it gets built into the finished goods stage.70 Due to its better use many economies have switched over to the PPI—the oldest such series is maintained by the Bureau of Labor Statistics (BLS) for the US economy—the index is capable of measuring prices at the wholesaler or the producer stage—widely used by private business houses in their price targetting.71‌‌

Once India shifts from the WPI to the upcoming PPI, the economy is supposed to have a better idea about the trends of inflation.

Housing Price Index

India’s official Housing Price Index (HPI) was launched in July 2007 in Mumbai. Basically developed by the Indian home loans regulator, the National Housing Bank (NHB) the index is named NHB Residex. Presently, the index has been introduced as a pilot project for five cities—Bangalore, Bhopal, Delhi, Kolkata and Mumbai, —till now it has been updated up to the quarter ended March 2016.

There are various concepts of housing price indices, and many sources and ways for compilling price data—both private and public. The methodology of

constructing such indices varies from country to country depending upon the use and purpose as well as the data availability. A Technical Advisory Group (TAG) was set up under the chairmanship of an adviser from the Ministry of Finance in 2006–07 which had members and experts from public and private bodies of the concerned field, i.e., NHB, CSO, RBI, HDFC, HUDCD, LIC Housing Finance Ltd., Labour Bureau, Dewan Housing Finance Corporation Ltd., and the Society for Development Studies (SDS). After reviewing international best practices and the methodology, sampling techniques, collection of price data for construction of real estate price indices in the USA (index developed by the office of Federal Housing Enterprise Dversight), Canada (New Housing Price Index) and the UK (Halifax Index), the TAG suggested a proper methodology for India.

The TAG decided to take 2001 as the base year for the index which was consistent with the base period of the other indices, i.e., 2001 for the revised CPI (IW), 2000–01 for the revised WPI and 1999–2000 for the revised GDP series. The base year was revised to 2007 in March 2014.

With an overall objective of bringing transparency in the Indian real estate market, the index is expected to serve some highly important and timely purposes:

(i) Whether a broker is quoting too high a price for houses in the cities.

(ii) Banks/housing finance bodies will be able to estimate only if the loan applications are realistic for the properties.

(iii) This will also show the level of non-performing assets in the housing sector.

(iv) And most importantly it will serve as a realistic price index for the buyers. (At present a buyer has no means, to judge whether a rise in property price was in the offing with the general level of inflation (i.e., at WPI) in the country, or has been scaled up disproportionately. Other than quotes from brokers, there are no means at present to evaluate the changes in price in this sector. At present the only index that gave some idea of housing price changes was the CPI (IW) which being a national index did not show regional variations.)

By early 2017, index was being developed only for residential housing sector. However, at a later stage, the scope of the index is to be expanded to

develop separate indices for commercial property and land. This is to be combined to arrive at the real estate price index. The aim is to develop a residential property price index for select cities and subsequently an all India composite index by combining the city level indices to capture the relative temporal change in the prices of houses at different levels.

Service Price Index

The contribution of the tertiary sector in India’s GDP has been strengthening for the past 10 years and today it stands above 60 per cent. The need for a service price index (SPI) in India is warranted by the growing dominance of the sector in the economy.72 There is no index, so far, to measure the price changes in the services sector. The present inflation (at the WPI) only shows the price movements of the commodity-producing sector, i.e., it includes only the primary and the secondary sectors—the tertiary sector is not represented by it.

The need for such an index was recommended by the working group (under the Chairmanship of Prof. Abhijit Sen, Member, Planning Commission) set up to revise the WPI (1993–94) series which was reiterated by the National Statistical Commission (headed by C. Rangarajan).The office of the Economic Adviser, Ministry of Commerce and Industry has been making an effort to develop sector-specific service price index for the country with the technical assistance being received under the World Bank Assisted Economic Reforms Projects (WBAERPs). At present, efforts are being made to develop service price indices for selected services initially on an experimental basis (covering road transport, railways, airways, business, trade, port, postal telecommunications, banking and insurance services only).

The basic studies of index construction are complete. Before formal launching of the index, the complete study is supposed to be discussed with academicians, practitioners and the users

of the services. The need to construct a service price index for the economy was felt more

after the OECD-Eurosat Report of 2005 on the subject.73