Making sense of the price index

Every time there is a fall in the growth rate of prices, there is a howl. These are government statistics, the housewife, the workers and...

Every time there is a fall in the growth rate of prices, there is a howl. These are government statistics, the housewife, the workers and the man on the street say. If prices of food rise, the farmer says “I am not getting any more”. Government statisticians feel bewildered. They do their job and get blamed for it. They are all possibly seeing one side of the proverbial elephant. Sometimes, of course, some people have an axe to grind. Governments tend to advertise only those numbers which bring them out in good light. Some workers’ groups those that bring out high rates of inflation. In well-ordered systems such games should not be played, for people see through them, either way. One press release said that in a recent month, the wholesale price level went up only by 1.6 percent, so no inflation. Another said that urban consumer prices went up by 6.1 percent in June ’99 over June ’98, the last month for which data is available. Now even the sharp newspaper reader is confused.

What is the trick with which6.1 percent got transposed as 1.6 percent, he feels. Or are all these people deliberately conning me? The first thing to realise is that if you are worried about the concerns of different groups there is no such thing as a price level. The wholesale price index tells us precisely what it is named for. If you take the trouble of going to the wholesale markets, prices probably have fallen. The consumer price index under discussion is for urban non-manual employees. There is another one for urban workers and yet another one for agricultural workers. They all have their own story to tell and of course consumer prices have risen far more sharply than wholesale prices. There was a time when all prices used to move together. They apparently don’t any more.

Will there never be a measured relationship between increased prices and their impact on a particular group? In principle the answer is yes. No index will represent the highly heterogeneous characteristics of consumers. Even if, properly done, the index willrepresent general tendencies of prices, but not the exact impact. Another method may however be of some use. It should be possible however to build up a more transparent information system to address the problem. If the price data collected for price index purposes is made available in a more transparent manner, it should be possible for particular groups to prepare indications of the impact of prices on them, by using their own consumption patterns. These cannot be used for purposes like negotiations of wage contracts, which would need scientifically worked out numbers, but would help in improved understanding of the impact of inflation.

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Why is it that the consumers price index is now rising quite fast, while the wholesale price index is not? This was not true earlier. The correlation between wholesale and consumer prices was always very very high. One would have thought that with liberalisation, mo-re competition and improved markets, prices would move together, instead of the other way around. Thisneeds so-me explanation. Perhaps the committee which is looking into the reasons of the price index can examine this question in some detail.

In fact, recent experience has been in the retrograde direction. When the question of rising food prices is raised, for example, in many cases, it is really being said, our income is going up and we do not get what we want, at a reasonable price. There are hundreds of varieties of rice in India to take an instance and now the housewife has learnt to discriminate. But our marketing systems and our politico-bureaucratic decision machinery have not. I remember when I chaired the Agricultural Prices Commission, I had recommended a four-anna price differential for government purchases or extra-superior long rice. Our scientists had produced the parimal varieties — like basmati — and our farmers were producing millions of tonnes. I said give them four anna per kg. The Finance Secretary, then an economist friend, now holding a position of higher authority, came to meet meand said, Yoginder, this is not right. I reminded him that his wife had just said a day before — we were neighbours in government housing — that she paid seven rupee a kilo for parimal and he was grudging four annas on half of that. He went away grumbling, and added ten paise as the “Alagh Factor” to the price.

I was happy at the principle of the quality differential being accepted. But in 1998, the price differential was again abolished. A politically influential state got the higher end of the price accepted for all and a state like Haryana, which benefitted from the difference, lost out. I was sad. A month earlier in Prisunic — a large chain of stores in Paris — I was happy to see a prominent display of Riz Basmate Indien. We have arrived, I said to myself, little knowing that the hatchet men were at it, at home. How are we to compete in the world, with insensitive policies at home and important decisions taken by default?

We need standardisation, quality differentials and competition to reduceprice differentials. We need markets and we need reform., It is a win-win situation. The farmer will get more, the housewife will be happier. Big industry gets its reform through. The small man keeps on waiting at the mercy of the crook or the babu of the parastatal. We should support those who cover the last mile.