Is Indian Inflation really low?  

A few weeks ago, I wrote a blog called “Why is the inflation rate low in some Asian countries?”. Today, it’s about the potential counterarguments (as any humanities student would say obvi) to this claim. How quantifiable is economics as a subject? Is it possible to have hard evidence or facts behind every claim??

When the entire world is grappling with significant inflationary pressure, India has been operating well within the target range of 2% to 6% as spelt out by its Central Bank, close to the midpoint, at 4.25% as per May 2023 data. By the way, this is retail inflation rate, based on Consumer Price Index (CPI). India is in a deflation zone considering the Wholesale Price Index(WPI) that turned negative since Feb 2023 from a positive of ~15% around a year back indicating overall reduction in prices. Both the indices are calculated with respect to a base year, 2012 calendar or FY 2011-12, and the yearly inflation rate is calculated as a % change of the movements in the respective years compared to the base year. CPI looks at the movement of prices through the lens of the consumers and WPI looks at it through the producers’ lens. While India’s Central Bank, the Reserve Bank of India (RBI) considers CPI based inflation to decide on its monetary policy since 2014, the Government keeps a close watch on WPI additionally to understand the broad economic trends.  The baskets of items for these 2 indices vary significantly along with their weightages so much so that while CPI includes major services, WPI excludes them. Even though none of the indices indicate an alarmingly high inflation that the world in general is dealing with, the fact that these indices indicate contrasting views with the devil that lies in the composition of these indices, can potentially confuse any reader. India’s lower Inflation is commonly ascribed to the country’s diplomatic relations with Russia that has kept its fuel costs low and its ability to manage the supply side of the equation reasonably well besides a robust monetary policy which did not splurge monetary resources during the pandemic.

CPI is the most popular way of measuring Inflation or deflation across the globe. While RBI’s switch to CPI from WPI in 2014 is aligned with most countries in the world, how far does the CPI basket take care of the changing demographics and the varying consumption pattern including substitutable products, is a big question? The comparison of CPIs between countries is also flawed as the compositions in respective baskets are different. Food and beverages constitute 45.9% of the CPI basket in India and within that the CFPI(Consumer Food Price Index) constitutes 39.06%.  This is much higher than most industrialized countries. UK, US, Germany, Canada have it ranging between 8% and 16%. The BRICS peers like Brazil and South Africa have their food weightage at 26% and 19% respectively. Even within the demographics of India, is an urban Indian consumer truly represented with such a high weightage on food? ICRIER (Indian Council or Research of International Economic Relations) reported that, “Higher the weightage of food, more cumbersome is for the monetary policy to contain Inflation, as is the case in India”. With the Food prices contained, the CPI with higher weightage on food takes away the focus on inflationary trends in other than Food.  Moreover, CDs, Cassettes, Tape Recorders and other obsolete items still appear in the 299 items basket of the CPI despite the fact that they have been out of the shopping cart of any Indian citizen for over a decade. There is no doubt that the basket together with its weightages needs an overhaul. The question remains as to how credible will be the stated CPI as a measure of Inflation till such an exercise is completed.

 Urban India and rural India has very different consumption pattern.  The basket doesn’t appropriately represent this difference.  A commonly used example is wheat vs wheat flour.  The price of these two do not necessarily follow the same trend.  So, while it may appropriately represent rural India, it doesn’t represent their urban counterpart. 

The other issue is weightage on services.  There is very little weightage on services in India’s CPI, whereas the Indian consumer, especially the urban ones have started spending a larger chunk of their incomes on services.  

The types of goods in the basket are also an issue.  Quite a few items that still represent the basket are outdated in today’s India, e.g., radio.  With smartphone all around, the usage of traditional radio (I have seen pictures on the net) is almost extinct.  There are many such.  Land phone is another such example.