By Harsh Doshi
The Consumer Price Index (CPI) was chosen as the benchmark inflation index by the RBI for inflation targeting. It was proposed by the Urjit Patel Committee. The reason cited was that CPI better depicts the hardships that the consumer directly faces as a result of inflation. CPI is calculated using a basket of 299 commodities, far less than that of the Wholesale Price Index, meant to affect the industry. The WPI has a basket of 676 commodities, owing to the higher number of raw material inputs in factories. However, there is a disparity caused by the presence of multiple CPIs calculated by different Government agencies.
The divisions and distinctions
The Ministry of Statistics and Programme Implementation (MoSPI) calculates CPI, both nationwide and for individual states. This is the index that RBI follows while announcing its monetary policy. However, the Labour Bureau, another Government agency calculates three versions of the CPI, one each for the Industrial Worker (CPI-IW), the Rural Labourer (CPI-RL), and the Agricultural Labourer (CPI-AL). This multi-index calculation, all by legitimate government agencies creates disparities for while compensating employees. The commodity basket is divided into six broad categories for the purpose of building index. They are Food, Tobacco and Intoxicants, Fuel and Light, Housing, Clothing and Footwear, and Miscellaneous.
The index is a weighted average of commodities belonging to these broad categories. Though the weights have been given keeping in mind consumer habits, there is an amount of arbitrariness to them. This reflects in the minute differences in weights given by MoSPI and the Labour Bureau. For example, by comparing the Food group in CPI-IW by the Labour Bureau and the MoSPI CPI, the latter weighs it higher by eight percentage points. More so, there is no weight given to Housing in the CPI-RL and CPI-AL, which does not make complete economic sense. There are various other minute differences in the weight allocation.
Devising the appropriate base
Secondly, the base year followed by the two agencies is different. While MoSPI has fixed the base year as 2012, the Labour Bureau has fixed it at 2001. The fixing of a relevant base year is crucial in the calculation of inflation indices. While both 2001 and 2012 can be considered as economically normal years, prices have changed drastically since 2001, especially in the years after the Global Financial Crises of 2008 leading to a recession, and double digit inflation in 2013. 2012 thus becomes a more reliable and economically sensible base year for inflation calculation. Multiple CPIs do not affect inflation targeting as much as they affect labour compensation.
Differentials among the CPIs are bound to arise due to difference in weights and different base years. This gives incentives to employers to choose the lower index that is applicable to their case and under-compensate the employee. This also leads to a lot of confusion on the part of the employee, especially because the Labour Bureau follows a 2001 base year, pushing the index number value to as high as 800. The presence of a uniform methodology will put these problems to rest.