Though wholesale price index (WPI)- based inflation has registered 10 straight months of negative growth, the economy is currently not going through a deflationary situation, said Pronab Sen, chairman, National Statistical Commission. In an interview with Surabhi, Sen said that the divergence between WPI and retail inflation would gradually equalise. Excerpts:
What is your opinion on the recent fears about deflation?
The confusion comes as, under the IMF method for quarterly estimates of GDP, any change in tax rates or the tax compliance is not taken as a change in the real income of the country but as a price effect. So, while we calculate the total taxes in nominal terms on the basis of the collection, for calculating the real growth in taxes, we take the growth of the tax base (manufacturing, services and imports). The difference between these is then showed as the price. But we use a different method for calculating the annual estimates where the nominal tax revenue is deflated by the weighted average of WPI and CPI. At present, what we see is essentially because there was a tax change towards the end of the year — the excise duty that was levied on petroleum in January.
But the finance ministry has raised the issue of deflationary tendencies in the economy.
You can argue what deflation is. What the finance ministry is saying is that the economy is going through 10 consecutive months of negative growth of WPI. But, the CPI has never been negative. So, it is a matter of interpretation. But by and large, a reduction in prices due to a global reduction in commodity prices is not deflation. Deflation happens only when prices go down because of a lack of demand. We are not in that situation.
Why has there been a divergence between WPI and CPI data?
The WPI includes everything from raw materials, intermediates, capital and consumer goods. These are all stages in production. When price decline is due to the reduction in raw material prices, particularly global prices, it will first show up in the raw material prices in the WPI — this is the first point of divergence after which prices in each category will reduce. Hopefully this spell would continue and would equalise. This transmission of prices from raw materials to finished goods will differ from country to country. In countries which have very little inventory, the transmission will be very swift. But in India, with three to four months of inventories, can take eight to nine months. There would also be gaps in sectors such as agriculture. In the WPI, food prices are measured at the mandi level, while the CPI does it at the local shop level. So trade and transport margins are built into the CPI and WPI and you could have increases there.
With the Reserve Bank of India focusing on CPI inflation for monetary policy decisions, how relevant is the WPI?
Early indicators for a cost push inflation will be evident in the WPI and appear in the CPI after a few months time. If you are really thinking of the future, can you expect a price increase? The WPI will give it sooner. But if it is a demand pull inflation, then it will show up in CPI first.
Will there be a spike in inflation due to the poor rains?
We don’t know. A lot will depend on the government. Last year also saw a bad monsoon and everybody expected prices to go up but prices crashed as the government released food grains in the market. If it does it this year again, then prices won’t go up very sharply.