Inflation Measurement - WPI & CPI...Whats New?

The latest WPI  has a basket of 676 items with 5482 quotations.     The major criticism for this index is that 'the general public does not buy at the wholesale level',   thus WPI does not give the actual feeling of the amount of pressure borne by the general public.   However,  the increase in wholesale prices does affect the retail prices and as such give some feel of the consumer prices.

Consumer Price Index (CPI)

The CPI measures price change from the perspective of the retail buyer. It is the real index for the common people. It reflects the actual inflation that is borne by the individual.  CPI is designed to measure changes over time in the level of retail prices of selected goods and services on which consumers of a defined group spend their incomes.   Till January 2012, in India there were only  following four CPIs compiled and released on national level.    (In some countries like UK, Malaysia, Poland it is also known as Retail Price Index).

(1) Industrial Workers (IW) (base 2001),

(2) Agricultural Labourer (AL) (base 1986-87) and

(3) Rural Labourer (RL) (base 1986-87)

(4) Urban Non-Manual Employees (UNME) (base 1984-85),

The first three are compiled by the Labour Bureau in the Ministry of Labour and Employment, and the fourth is compiled by Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation.   These four CPIs reflect the effect of price fluctuations of various goods and services consumed by specific segments of population in the country.   These indices did not encompass all the segments of the population and thus, did not reflect the true picture of the price behaviour in the country as a whole.  

New Series of CPI Started in 2012

Therefore, there was a strong feeling that there is a need for compiling  CPI for entire urban and rural population of the country to measure the inflation in Indian economy based on CPI.    Thus, now Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling a new series of CPI for with the following measures:

(a) CPI for the entire urban population viz CPI (Urban);

(b) CPI for the entire rural population viz CPI (Rural)

(c) Consolidated CPI for Urban + Rural will also be compiled based  

     on above two CPIs

These  would reflect the changes in the price level of various goods and services consumed bythe Urban and rural population.   These new indices are now compiled at State / UT and all India levels.

The CPI inflation series is wider in scope than the one based on the wholesale price index (WPI), as it has both rural and urban figures, besides state-wise data. The new series, with 2010 as the base year, also includes services, which is not the case with the WPI series.   However, this new series will become comparable only in 2013 when the data for 2012 will also be available for comparison.

A comparison of this new series with WPI is given below :-

	WPI	CPI - New Series wef Feb 2012
Base Year	2004-05	2010
Elementary Items	676	200 (Weighted items)
Weightage of Food products (%)	243	49.71
Weightage of Energy products (%)	14..91	9.49
Weightage of Miscellaneous Items (%)	Services not included	26.31

Producer Price Indexes (PPI) – 

These are indices that measure the average change over time in selling prices by producers of goods and services. They measure price change from the point of view of the seller. Majority of OECD countries measure inflation based on Producer Price Indiex (PPI) while only some others use WPI.  Countries like Japan, Greece, Norway and Turkey use WPI.   Already WPI has been replaced in most of the countries by PPI due to the broader coverage provided by the PPI in terms of products and industries and the conceptual concordance between PPI and system the national account.   PPI is considered to be more relevant and technically superior compared to one at wholesale level.   However, in India we are still continuing with WPI.

Cost-of-living indices (COLI):  

This is different from CPI.   This index aims to measure the effects of price changes on the cost of achieving a constant standard of living (i.e. level of utility or welfare) as distinct from maintaining the purchasing power to buy a fixed consumption basket of good and services.   Maintaining a constant standard of living does not imply continuing to consume a fixed basket of goods and services. A COLI allows for the fact that households who seek to maximize their welfare from a given expenditure can benefit by adjusting their expenditure patterns to take account of changing relative prices by substituting goods that have become relatively cheaper, for goods that have become relatively dearer.   The use or preference for particular goods may also change.  

In the long run, the various PPIs, WPIs and the CPI show a similar rate of inflation. In the short run PPIs often increase before the WPI and CPI. Investors generally follow the CPI more than the PPIs. In India WPI is used instead of CPI.

In News Recently :

What is Core Inflation : The concept is used to estimate the inflation by excluding food and energy prices from the basket of goods and services that represents a typical household's consumption.   In mid 2012, RBI Governor threw up the conundrum posed by this "Core"inflation by saying "In our economy, where food constitutes nearly 50% of consumption basket and fuel has a weight of 15%, can a measure of inflation that excludes them can be called "Core".   He suggested that India should move towards developing and using a Producer Price Index (PPI) to gauge inflation more accurately as wholesale price index does not capture the price movement of services and is a hybrid of consumer and producer price quotes. 

New GDP data with 2011-12 as base year...How Does it Matter?

At present, the GDP is computed on 2004-05 base year.

Seeking to present a more realistic picture of the economy, the government will release a new series of national accounts with 2011-12 as base year for computing the economic growth rate.

The Gross Domestic Product (GDP) data based on the new series has been released for three consecutive years from 2011-12 in January 2015.

Till now, the GDP is computed on 2004-05 base year. “The new series will better reflect the economy as it would include more sectors. However, it would be difficult to say whether there would be any significant change in growth rates for the previous years,” National Statistical Commission Chairman Pronab Sen, who was associated with formulation of the new series, said.

He further said that it may take about one year to ascertain about the change in growth rates of different sectors and economy as a whole based on the new series during the previous years.

“As per the revision policy of the national accounts, the estimates for the year 2011-12, 2012-13 and 2013-14, due for release in January 2015, would have been the third revised estimates, second revised and first revised estimates, respectively,” as official statement said.

Since these estimates have been compiled afresh, these would be referred to as “New Series” Estimates, it added.

The government will also be revising the base year for consumer price index (CPI), wholesale price index (WPI) and index of industrial production (IIP).

The new series of IIP and WPI are likely to be released by March 2016. The growth in the new series of IIP and WPI would be incorporated in the provisional estimates of 2014-15, to be released in May 2016.

The National Statistical Commission has suggested that the base year for computing national account should be revised every five years.

The base year of the national accounts is changed periodically to take into account the structural changes which take place in the economy and to depict a true picture of the economy through macro aggregates.

The first official estimates of national income were prepared by the Central Statistical Organisation (CSO) with base year 1948-49 for the estimates at constant prices.

These estimates at constant (1948-49) prices along with the corresponding estimates at current prices and the accounts of the Public Authorities were published in the publication, ‘Estimates of National Income’ in 1956.

With the gradual improvement in the availability of basic data over the years, a comprehensive review of methodology for national accounts statistics has constantly been undertaken with a view to updating the data base and shifting the base year to a more recent year.

The base years of the National Accounts Statistics series have been shifted from 1948-49 to 1960-61 in August 1967; from 1960-61 to 1970-71 in January 1978; from 1970-71 to 1980-81 in February 1988; and from 1980-81 to 1993-94 in February 1999.

Thereafter it was changed to 2004-05 in 2006.

Article in The Hindu, dated Nov., 2, 2014

What are the Indirect Costs of Regulation?

Congress is debating whether to make federal agencies estimate “indirect” costs of the regulations they propose. Skeptics suggest the term is too vague.

In reality, a requirement to estimate indirect costs need not create a Pandora’s grab bag of miscellaneous and poorly specified cost calculations. A little bit of economics goes a long way toward defining indirect costs of a regulation in a coherent way.

Indirect costs are the costs to society that occur when people change their behavior in response to incentives created by the regulation. Major indirect costs include value lost when people cut back purchases in response to regulation-induced price increases, reductions in quality or convenience caused by regulation, and risk/risk tradeoffs.

That’s a mouthful of complicated language. But airport security regulations provide a familiar example of all three indirect costs. The accompanying graphic, based on a Mercatus study published several years ago, identifies several major costs of airport security screening. The obvious, direct cost is the money spent to pay for Transportation Security Administration (TSA) screeners. But that’s not the only or even the largest cost.

The screening increases ticket prices because it is funded with an explicit fee imposed on airline passengers. As a result, fewer people fly. The people who decline to fly sacrifice some value because they forego a trip entirely or have to take a less convenient mode of travel. The lost value is big—about $2.35 billion in 2005.

The people who continue to fly also feel some costs in addition to the ticket fee. They spend more time waiting around to get groped in airports. The increased waiting time alone was worth $2.75 billion in 2005, based on the Department of Transportation’s own estimates of the value of an hour of waiting time.

Finally, airport security regulation also increases some people’s risk of dying in travel accidents. Peer-reviewed economic research found that new post-9/11 airport security regulations increased highway deaths by 116 people in the fourth quarter of 2002. Many people taking short trips substituted automobile for air travel, and auto travel is riskier than air travel.

Focusing on social costs also reveals what factors should not count as indirect costs. Job losses, for instance, are not a cost of regulation. They are just an example of how regulation redistributes opportunities from some members of society to others. Airport security regulation destroyed the jobs of contractors who used to operate checkpoints pre-9/11, but it created jobs for TSA agents and people who manufacture 3-ounce travel-sized bottles of shampoo. The only job-related costs of regulation are the transition costs of moving people from one set of jobs to another.

Like an iceberg largely submerged below the surface, indirect costs are hidden—but dangerous to ignore.

Article By Jerry Ellig, "What Are the Indirect Costs of Regulation?", Mercatus Centre, George Mason University, Dec. 10, 2011

GDP - The Worst Way to Measure a Country's Progress

Which is better for a country’s well-being: $10 million spent constructing a jail, or $10 million spent producing a line of smartphones? How about clear-cutting rain forests to produce $10 million in lumber? Or a storm that requires $10 million in repairs?

Using today’s most common shorthand of national welfare, gross domestic product, all of the above are equal. GDP measures only output, and makes no claims on the quality of that output, let alone on subjective concepts such as social progress or human happiness. It does what it was intended to do -- offer a value of marketed goods and services produced in a country in a given time frame -- and does it reasonably well.

As useful as GDP is, it has some crucial flaws. It can obscure growing inequality and encourage the depletion of resources. It can’t differentiate between spending on good things (education) and terrible things (cigarettes). It doesn’t measure the economic services that nature provides, such as the dwindling wetlands that once protected New Orleans from storms, or those that don’t come with a market price, such as raising children. It fails to account for the value of social cohesion, education, health, leisure, a clean environment -- in other words, as Robert Kennedy once put it, GDP measures everything “except that which makes life worthwhile.”

SOME IMPROVEMENTS

This is why more and more economists and activists are pushing to update GDP. The risk, though, is trying to incorporate too much into one indicator -- particularly when it comes to subjective measures such as happiness or well-being. A far better approach would be to improve some of the measurements used in national accounts, and develop a wider range of individual indicators of welfare to inform public policy.

In doing so, here are four guidelines to keep in mind.

First, economists need faster access to accurate information about growth, especially during recessions. Consider that the original estimate of GDP growth for the fourth quarter of 2008 was a contraction of 3.8 percent. Over several years that figure was revised to 8.9 percent -- suggesting a much more severe recession than most people realized in early 2009 when Congress was debating President Barack Obama’s stimulus bill. Several researchers, notably Jeremy Nalewaik of the Federal Reserve, have said that gross domestic income had suggested the onset of the recession earlier and with greater accuracy than GDP had. Nalewaik and several co-authors argued that a combined GDP-GDI measure would be more accurate, helping to offset some of the measurement errors that inhere in GDP and ideally giving policy makers a better economic picture when it most counts.

Second, we should take better account of non-market production -- like household work -- that affects the economy. The Bureau of Economic Analysis, which compiles the national-income accounts of the U.S., has done an admirable job in recent years of using “satellite accounts” to take a more comprehensive snapshot of the economy. These enable experimentation with what data the bureau collects, without jeopardizing the credibility of the existing national accounts.

For instance, a recent study calculated a satellite account for household production -- including non-market domestic services such as gardening and housework, returns on consumer durable goods, and return on government capital -- and found that GDP would have been 26 percent larger in 2010 if it had included such criteria. The study also found that the historical annual growth rate of GDP would have been slower and measures of income inequality would have been lower. Although such data necessarily entail uncertainty, they can still offer illuminating detail that’s missing from traditional measures.

EDUCATION, HEALTH??

Third, because GDP measures average income, it can obscure important discrepancies at the household level. When incomes rise disproportionately for the well-to-do, for instance, mean income can increase even though many regular workers see their paychecks cut. As a report from the think tank Demos recently noted, although U.S. GDP more than doubled over the past 30 years, median household income grew by only 16 percent. One possible solution, which the authors support: Create new measures of household data for disposable income to better capture families’ welfare and buying power.

Fourth, economists are generally converging on the idea that some measurement of environmental impact could be added to GDP. The current system doesn’t account for pollution, the depletion of natural resources or the economic benefits nature can provide. Fortunately, data on environmental accounting are improving, and it’s possible, statistically if not politically, to place a monetary value on environmental depletion that could be subtracted from GDP. One way to begin might be to experiment with satellite environmental accounts.

What about measures of social well-being? This information is important, but measures proposed as a replacement or improvement to GDP, such as the Genuine Progress Indicator, typically suffer by including ideological or subjective criteria. Better to collect such data as part of a limited dashboard of additional indicators -- on health, the environment, social cohesion and so on -- that is separate from GDP. This is the approach recommended by the Stiglitz Commission, which did exhaustive work on this subject for the French government.

GDP is a universal, objective and very useful measurement. But we should recognize its limitations. Increasing GDP shouldn’t be governments’ only objective. Nor should GDP be considered a definitive measurement of human welfare. For that, we’ll have to expand our data. And, ultimately, hold our politicians to better account.

From: BloombergView.com 

Her Majesty's Laughable Laws :)

If you happen to unearth treasure worth even as little as Rs.10 rupees (16 US cents) in India, don’t even think of pocketing it - that’s because under a law introduced by the former British colonial rulers, it still belongs to “Her Majesty”. Now, however, the Treasure Trove Act of 1878 and nearly 300 other outdated laws are set to be repealed in the largest-ever cull of rules that make India one of the most puzzling places in the world to do business.

Prime Minister Narendra Modi is hoping that less regulation and faster decision-making will lift India from its ranking of 134 out of 189 countries on the World Bank’s ease of doing business table into the top 50 and attract investors. “Some of the laws on our books are laughable. Others have no place in a modern and democratic India,” said law minister Ravi Shankar Prasad who is leading the legislative clean-up. Previous administrations have failed to remove obscure laws dating back to the 19th century, either because of objections by government departments or simply a lack of will. But Modi’s officers have identified 287 obsolete laws for scrapping in a November session of parliament. On the chopping block along with the Treasure Trove Act is an 1838 law that says property in an area of the former imperial capital of Calcutta can only be sold to the East India Company, which laid the foundations of the British empire but ceased to exist more than 150 years ago.

An 1855 measure removing a certain tribe from the purview of local laws because it was an “uncivilised race” will also go. Even after all these have been abolished, there will still be hundreds of clauses within other laws and thousands of regulations that are real obstacles to business. “The government has started identifying these anomalies too,” Prasad said.

Spittoons out, scrawny inspectors back in

Flying kites or balloons without police permission is illegal across India as they are classified as an “aircraft” under a 1934 act, and a World War II decree outlaws the dropping of pamphlets from the air in the state of Gujarat. Under the Motor Vehicles Act, the state of Andhra Pradesh enacted a law that a motor inspector must have a clean set of teeth and anyone with a “pigeon chest, knock knees, flat foot, hammer toes and fractured limbs” will be disqualified. “There are instances where the entire statute is dysfunctional,” said prominent economist Bibek Debroy, who advised Modi during his election campaign and has written a book on the absurdities of Indian law. He said that obscure laws can sometimes be abused.

A swanky New Delhi hotel was threatened with a lawsuit for refusing to give water to a person who invoked an 1867 act under which a rest house must offer passers-by free drinks of water. Factory owners have suffered at the hands of government inspectors who insist on rules requiring spittoons to be kept in the premises as well as earthen pots for drinking water. Even if factories install modern fire extinguishers, they must still have red-painted buckets with water and sand to put out a blaze. Some have a found a way around absurd regulations.

A Post Office Act of 1898 stipulates that only the government has the right of “conveying by post, from one place to another” most letters, so courier companies get around this by calling the letters they send “documents”.

Live Mint, Oct 2014

The 'Illusive' Social Justice Under Constitution of India

Bharat Ratna Babasaheb Dr. B.R. Ambedkar, the Chief Architect of Constitution of India, is the man of millennium for social justice, in the sense that he became the deliverer of or the Messiah of the Dalits, the erstwhile untouchables, Other Backward Classes (OBCs), and women, constituting 95% of Hindu population. That big segment of population had been forced to live at a sub-human level from time immemorial, under caste system, sanctioned by Hindu scriptures. He was the man of millennium for social justice, since he was the first man in history to successfully lead a tirade of securing social justice to the vast sections of Indian humanity, with the help of a law, which practically repealed the concerned portions of Hindu scriptures.

Social justice denotes the equal treatment of all citizens without any social distinction based on caste, colour, race, religion, sex and so on. It means absence of privileges being extended to any particular section of the society, and improvement in the conditions of backward classes (SCs, STs, and OBCs) and women. Social Justice is the foundation stone of Indian Constitution. Indian Constitution makers were well known to the use and minimality of various principles of justice. They wanted to search such form of justice which could fulfill the expectations of whole revolution. Pt. Jawahar Lal Nehru put an idea before the Constituent Assembly
 

“First work of this assembly is to make India independent by a new constitution through which starving people will get complete meal and cloths, and each Indian will get best option that he can progress himself.”

Social justice found useful for everyone in its kind and flexible form. Although social justice is not defined anywhere in the constitution but it is an ideal element of feeling which is a goal of constitution. Feeling of social justice is a form of relative concept which is changeable by the time, circumstances, culture and ambitions of the people. Social inequalities of India expect solution equally. Under Indian Constitution the use of social justice is accepted in wider sense which includes social and economical justice both. According to Chief Justice Gajendragadkar.

“In this sense social justice holds the aims of equal opportunity to every citizen in the matter of social & economical activities and to prevent inequalities”.

The Constitution of India has solemnly promised to all its citizens justices-social, economic and political; liberty of thought expression, belief, faith and worship; equality of status and of opportunity; and to promote among the all fraternity assuring the dignity of the individual and the unity of the nation. The Constitution has attempted to attune the apparently conflicting claims of socio-economic justice and of individual liberty and fundamental rights by putting some relevant provisions.

Article 19 enshrines the fundamental rights of the citizens of this country. The seven sub-clauses of Article 19(1) guarantee the citizens seven different kinds of freedom and recognize them as their fundamental rights. Article 19 considered as a whole furnishes a very satisfactory and rational basis for adjusting the claims of individual rights of freedom and the claims of public good.

Articles 23 and 24 provide for fundamental rights against exploitation. Article 24, in particular, prohibits an employer from employing a child below the age of 14 years in any factory or mine or in any other hazardous employment. Article 31 makes a specific provision in regard to the fundamental right to property and deals with the vexed problem of compulsory acquisition of property.

Article 38 requires that the state should make an effort to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice social, economic and political shall inform all the institutions of national life. Article 39 clause (a) says that the State shall secure that the operation of the legal system promotes justice, on a basis of equal opportunity, and shall, in particular provide free legal aid, by suitable legislation or schemes, or in any other way, to ensure that opportunities for securing justice are not denied to any citizen by reason of economic or other disabilities.

Article 41 recognizes every citizen’s right to work, to education and to public assistance in cases of unemployment, old age, sickness & disablement and in other cases of undeserved want. Article 42 stresses the importance of securing just and humane conditions of work and for maternity relief. Article 43 holds before the working population the ideal of the living wage and Article 46 emphasizes the importance of the promotion of educational and economic interests of schedule castes, schedule tribes and other weaker sections.
 

The social problem presented by the existence of a very large number of citizens who are treated as untouchables has received the special attention of the Constitution as Article 15 (1) prohibits discrimination on the grounds of religion, race, caste, sex, or place of birth. The state would be entitled to make special provisions for women and children, and for advancement of any social and educationally backward classes of citizens, or for the SC/STs. A similar exception is provided to the principle of equality of opportunity prescribed by Article 16 (1) in as much as Article 16(4) allows the state to make provision for the resolution of appointments or posts in favour of any backward class of citizens which, in the opinion of the state, is not adequately represented in the services under the state. Article 17 proclaims that untouchability has been abolished & forbids its practice in any form & it provides that the enforcement of untouchability shall be an offence punishable in accordance with law. This is the code of provisions dealing with the problem of achieving the ideal of socio- economic justice in this country which has been prescribed by the Constitution of India.

The social justice scenario is to be investigated in the context of two streams of entitlements: (a) sustainable livelihood, which means access to adequate means of living, such as shelter, clothing, food, access to developmental means, employment; education, health, and resources; (b) social and political participation (enabling or empowering means), which is built on the guarantee of fundamental rights, and promotion and empowerment of the right to participation in the government, and access to all available means of justice, and on the basis of which “justice as a political programme” becomes a viable reality. We require therefore a study based on select illustrations of various issues relating to government policies on topics such as: (a) the right to food and water; (b) housing, which includes resettlement and rehabilitation; (c) access to education, (d) access to provisions of health and healthcare, (e) right to work, and (f) access to information and the right to communication. In short, one of the important ways in which the inquiry will proceed will be through taking stock of various forms that have occasioned the articulation of ideas of social justice. 

Governmental justice consists of various welfare schemes, law, legal literacy, administrative forms of arbitration such as tribunals, boards, courts, public interest litigation, new legal education, plus the constitutional idea of protection of weaker sections of the society and introduction of positive discrimination.

Published at Writer's Bloc, by: Shashikant, Student, Dept of Chemical Engineering IIT Mumbai