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VIEWPOINT
Core
To RBI Sore To Others
The RBI
governor says that core inflation is comfortable-what does it mean?
By
Jairam Ramesh
 On
January 15, while speaking at the Conference of Bank Economists in the
capital, RBI Governor Bimal Jalan said, "At present core inflation
is 3.4 per cent and is comfortable." Just the previous day, the Government's
own press release revealed that the "annual point-to-point inflation
based on the Wholesale Price Index (WPI) for the week ended December 30,
2000 was 8.16 per cent".
This is
for the first time that the concept of "core" inflation has
been officially used in a policy sense. The RBI did draw attention to
the concept in its 1996-97 Annual Report. Later, an econometric study
on the subject by an RBI analyst G.P. Samanta appeared in the summer 1999
issue of RBI Occasional Papers. Subsequently, the RBI's scholarly Deputy
Governor Venugopal Reddy discussed it in a lecture he gave in Hyderabad
in August 1999.
The inflation
rate measures the rate at which prices are increasing. If the inflation
rate is down it does not mean that prices are falling: all it means is
that the rate at which prices are increasing has declined. In India, we
have five different measures of the inflation rate-the WPI, the Consumer
Price Index for Industrial Workers (CPI-IW), the Consumer Price Index
for Agricultural Labour (CPI-AL), the Consumer Price Index for Urban Non-Manual
Workers (CPI-UNME) and the GDP Deflator. Of these, it is the WPI that
is the most frequently used. It gives weekly inflation rates with a lag
of two weeks. The CPI-IW is important because it is used to calculate
dearness allowance (DA) for organised sector employees. It is available
monthly with a lag of two months but, unlike the WPI which covers the
entire country, it is constructed for 40-odd cities and towns. The GDP
Deflator is the most comprehensive measure of inflation since it covers
services and non-tradeable commodities as well but it is a statistically
derived measure (ratio of GDP at current prices to GDP at constant prices)
and is not used in popular discourse as it is available only annually.
 The
WPI which uses 1993-94 as the base year and covers 435 items is called
the "headline" rate of inflation since it is the rate that captures
news every Monday. There is a point-to-point measure which calibrates
the rate of increase in a particular week or day of a particular year
over the same week or day the previous year. The other is the 52-week
average. Both are used but the weekly point-to-point is what dominates
headlines.
A current
inflation rate has both a permanent and transient segment. Transient components
arise from sudden shocks-like when the prices of onions or crude oil shoot
up or when the prices of edible oils come crashing down. As Reddy says,
core inflation has only a permanent component. It is the future underlying
rate of inflation anticipated by economic agents that does not change
with changes in output-either up or down.
While there
is no clear-cut definition and Reddy himself admits to some discretion
or judgement in its measurement, Samanta calculates four different indices
to calculate core inflation.
- Core
1: WPI minus primary food articles and administered price commodities;
- Core
2: WPI excluding primary food articles, primary non-food articles (like
cotton, sugarcane and oilseeds) and administered price commodities;
- Core
3: WPI excluding primary food articles, manufactured food products and
administered price commodities;
- Core
4: WPI excluding primary food and non-food articles, administered price
commodities and all other seasonal items;
After detailed
statistical analysis, he concludes that Core 2 is the least volatile and
the most superior measure. Presumably, Jalan had this in mind, although
it appears from the figures he quoted that he may have used Core 5-WPI
excluding administered prices. Hopefully, there will be some clarification
forthcoming from the RBI soon.
Core inflation
could be core to the central bank's monetary policy but it certainly is
not core as far as the government or consumers are concerned. If you are
going to exclude increases in primary food articles with a weight of 15.4
per cent in the WPI, primary non-food articles whose weight is 6.6 per
cent and administered price items whose weight is 16.4 per cent, then
you are really not reflecting real world concerns. When the inflation
rate zoomed in the latter half of 1998, core inflation was not high. But
it was this inflation spike that, more than anything else, caused the
debacle for the BJP in the assembly elections at the time.
True, both
inflationary expectations and inflationary experiences need to be tackled.
But it would be wrong if fighting core inflation rate were to be the core
of an anti-inflation strategy. Food-price inflation is the true core inflation
that we should be fighting.
(The
author is with the Congress party. These are his personal views)
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