8.5. Services Price Index (SPI)

The contribution of the tertiary sector in India’s GDP has been strengthening for the past 6 to 7 years and today it stands approximately at 54 per cent. The need for a service price index (SPI) in India is warranted by the growing dominance of the sector in the economy. There is no index, so far, to measure the price changes in the service 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 headed by Prof. Abhijet Sen which was set up to revise the WPI (1993–94) series and was reiterated by the National Statistical Commission (headed by C. Rangarajan).

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).

Core Inflation: Core inflation calculates the price of all the goods and services in the economy excluding the energy and food items. Such a measure does not include the volatile items, which may distort the true picture of inflation in the economy. As a result, this measure reflects the change in demand in the economy.

To understand why the categories of food and energy are more sensitive to price changes, consider environmental factors that can destroy a year’s crops, or fluctuations in the oil supply from the OPEC cartel. Each is an example of a supply shock that may affect the prices for that product. However, although the prices of those goods may frequently increase or decrease at rapid rates, the price disturbances may not be related to a trend change in the economy’s overall price level. Instead, changes in food and energy prices often are more likely related to temporary factors that lie outside the economy and may reverse themselves later.