To put matters in proper perspective, inflation refers to a situation wherein too many people chase too few goods and too few services. Obviously, the goods and services sought tend to be priced higher owing to the higher demand. When inflation rules low, too few people chase too many goods and too many services. Naturally, goods and services tend to get under-priced.
Clearly, price plays an important role in the determination of inflation. But then when we talk of prices, there are prices and prices. For example if one talks of the price of an essential commodity like food grain, another may talk of the price of a fast moving consumer good like a refrigerator; yet another may talk of the price or fee he has to pay to pursue higher education. Hence the good or service (like education) being sought has to be paid for. Since there are goods and goods and services and services, a basket of goods and services should be considered for the purpose of price determination which in turn has to be considered for the purpose of determination of inflation. The goods and services placed in the basket should be appropriately weighted to represent the whole gamut of goods and services used by the people so price determination is as close to ground reality as possible. The basket so created should lend itself to revision since the complexion of the economy and hence the pattern of usage of goods and services by the participants in the economy, viz, the people of the country, amongst others, is bound to change over a period of time.
This explains why, at present, there are four main series of price indices compiled at the national level. Out of these four, viz., Consumer Price Index for Industrial Workers (CPI-IW), Consumer Price Index for Agricultural Labourers / Rural Labourers (CPI-AL/RL) and Consumer Price Index for Urban Non-Manual Employees (CPI-UNME) are consumer price indices. The Wholesale Price Index (WPI) number is a weekly measure of the wholesale price movement in the economy.
This also explains why the inflation rate computed and announced by the government periodically is not reflected in the prices of goods and services. For example, although inflation rules at a low level today, the price of food grains, edible oil, vegetables, cereals, etc, has not fallen in proportion to the fall in inflation rate. What is the reason? The reason is that the inflation figure periodically announced by the government is based on the Wholesale Price Index (WPI) number, which is a weekly measure of wholesale price movement in the economy and not the consumer price index. Otherwise, three consumer price indices will have to be computed. This is because an industrial worker’s consumption needs differ significantly from the consumption needs of an agricultural or rural labourer. These two again differ vastly from the consumption needs of an urban non-manual employee.
During the period, beginning with 1970-71, the base price for the purpose of computation of WPI-driven index was set as equivalent to 100 at three different points of time. The said points of time are: 1970-71, 1981-82 and 1993-94.
The Indian economy, though agro-based even today, finds itself in a situation that reminds one of the economy of an advanced country like USA and Australia. This is because the contribution of agriculture to the GDP of India is now a meagre 19 percent although we call agriculture as the primary sector. The contribution of the service sector which we call the tertiary sector or third-level sector, to the country’s GDP is a whopping 55 percent. The secondary sector, viz., industry, contributes the balance, viz., 26 percent. Of course, its reduced contribution to the country’s GDP notwithstanding, the primary sector or agriculture still keeps at least 60 percent of the country’s population employed. In that sense, we can still call it the primary sector.
All the same it cannot be denied that the complexion of the country’s economy has changed radically, with the service sector asserting itself lately. Hence the need to develop an index which can reflect the price level concerning the whole gamut of goods and services generated and marketed in the country and abroad, hardly warrants an emphasis. In fact, the index or indices we now use to ascertain the price levels cover only goods and not services. In view of the dominant role that the service sector has been playing the country’s economic growth, a new index concerning the service sector is being developed by the government of India. Until such time, we have to make do with the various indices periodically computed and published by the government of the country.
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