INDIA’S INFLATION: A STATISTICAL ERROR

ARTICLE BY,

SARANKUMAR.S

INDIA’S INFLATION: A STATISTICAL ERROR

Inflation is a measurement to define the rise in the general level of prices in goods and services in a country’s economy. The problem of inflation used to be confined to national boundaries, and was caused by domestic money supply and price rises. Widely there are two common techniques CPI and WPI followed to determine it. In India we follow WPI-Wholesale Price Index, relatively an older one compared to CPI. In India the inflation rate is released for every 10 days and that makes its effects in both stock markets and fixed price markets. India’s method of calculating the inflation is an older method also there is no updation in the WPI. It makes our inflation rate statistically wrong and the inflation we determine is not the exact value.

Basically the inflation is calculated to determine the rise of prices in the markets for primary articles and commodities. It gives an insight about the price rise in the commodities. The problem of inflation used to be confined to national boundaries, and was caused by domestic money supply and price rises. In this era of globalization, the effect of economic inflation crosses borders and percolates to both developing and developed nations. High inflation, stagflation or deflation are all considered to be serious economic threats.There are many things which causes inflation even printing too much money will make the inflation. If there is a lot of money going around, then supply is plentiful compared to the products you can buy with that money. The other factors are increases in production cost, tax rise, declines in exchange rate, decrease in the availability of resources such as food or oil, war or other events causing instability. Economists generally believe that money supply is the key cause of inflation; in 2008, however, skyrocketing prices of oil, food and steel caused runaway levels of inflation in the world economy that collapsed only because of the global Financial Crisis. In addition, if a country has a higher rate of inflation than other countries, its balance of trade is likely to move in an unfavorable direction. This is because there is a decline in its price competitiveness in the global market.

Now when we focus into the Inflation in India is always high. As because for any developing country like India the inflation rate will be higher and it cannot be reduced easy. It is so, as the monetary and taxing policies will be targeted for the growth of the economy and it will not be focused on the controlling of rise in the price of commodities. The increase of the prices for food commodities makes the adverse effect in India as the most of our population belongs to below poverty line. Basically the rise in the prices of food products is not because of the economic policy its due to the people who hide the goods depending on their storage capacity. They create a black market for selling of these goods and also some goes for illegal export.

To get to know about the exact view of India’s calculation of inflation we can compare the prices of the primary articles and the inflation rate. At that time the inflation rate were in negative but the prices of the commodities are so high. Particularly the prices of the food products is been increased to a greater extent. Now this is where the Indian government policy of calculating the inflation is going wrong. The use of WPI for calculating inflation is not there now in many developed countries. The use of it is also not in a effective manner in India. For determining the WPI there are some selected commodities and the prices of that in wholesale are taken into account for the calculation of inflation.

Now here is where the mistake comes the total commodities to calculate this WPI is 2800. But this list of commodities are not changed from 1993 till now. There are certain products like Dalda, Cibacca toothpaste etc in that list which are not even available in the market now.  Even pager which never exists in the market at present is there in the list. Any of the governments from 1993 didn’t even try to change or update it. They used it as a political advantage to make the common people believe that the inflation is under control. But in the mid 2009 there occurred a situation where the price for the commodities is much higher and the inflation rate is in negative. This is where it proved our calculation of inflation is a complete wrong and it needed a change.

If we follow CPI- Consumer Price Index, the rate of inflation can be calculated accurately. It is because it denotes the prices that are the products reaches to the consumers, but in the WPI it takes the prices of the products at the stage of wholesale. What makes the difference between the both is the prices of the product, it will be changed when it reaches to the consumers when compared with wholesalers. The inflation is calculated to denote the price rise and the purchasing power of the consumers. Now by using WPI how can the above be achieved. This is the thing happens now in India, in order to stable the conditions of economy and the market the government of India is undergoing the wrong statistics even by knowing it.

Now in order to reform the calculation of inflation the thing our government should do is to improvise the calculation of WPI. The list of commodities in the WPI should be updated to the present status. There should also be consistent reform measures in the future course.