“The current measure of price rise in the country is faulty and misleading, requiring complete overhaul.” Give arguments For and Against this view.
Data about price level and the pattern of price rise or decline is essentially required by every economy and measurement of inflation rate in every economy is thus a crucial input for the economic policy makers. Several economic decisions depend heavily on the measure of inflation rate. Various monetary policy measures like the Bank Rate and the resultant interest rates (both lending and borrowing), money supply, credit creation by the banks are dependent on the rate of price rise. Similarly, fiscal policy measures like the rates of import and export duties, excise duties and personal taxation rates are also influenced by the rates of price rise and decline prevailing in the economy. In India, the inflation rate is worked out on the basis of the variations in the Wholesale Price Index (WPI). Consumer Price Index (CPI), on the other hand, determines the amount of dearness allowance to the industrial workers.
Arguments For the View
(a) The WPI is a representative index which includes the variation in the rates of certain commodities in which the food articles, engineering goods, manufactured products and other goods produced in the country are represented. The data is then used to measure the rise in wholesale prices. It does not completely represent the change in price of the food articles fully and requires changes to achieve this.
(b) The economy has become globalised and open now and the composition of its total production as well as exports has undergone drastic changes. The composition of WPI must also change to meet the requirement of the modern times.
(c) For the consumers, it is the CPI which is more representative of the price situation of the goods required by the households. Hence, for the purpose of consumers, the CPI-related inflation rate must also be revealed to the general public so that the true picture on the price front becomes known to everyone.
Arguments Against the View
(a) The WPI-based inflation figures are used by the government for various decisions and not specifically for the consumers. These figures have to be broad based and representative of the whole economy and not of a particular segment of it.
(b) As per the practice followed in other parts of the world also, the WPI is considered to be a true representative of the measure of the fluctuations in the general price level in the country. The data is used for various economic applications by the government, as also by various private sector organisations.
(c) WPI and CPI are used for two separate measures and applications. Their purpose is also different. Rather than complete overhaul of the system, it would be better if the composition of the two is re-worked and suitably modified to meet the current day requirements. Further, efficient application of the two is also very important.