Pronab Sen, chairman, National Stastistical Commission and former chief statistician talks about the debate over (which is) the right inflation gauge for monetary policy formulation, the dichotomy between wholesale price index (WPI) and the new consumer price index (CPI), and the IIP data volatility in an interview with FE's Rajkumar Ray, Banikinkar Pattanayak and KG Narendranath. He also hints that since the producer's inflation expectation has sharply come down, the RBI may have a reason to start lowering policy rates. Excerpts:
Q: Can the new consumer price index (CPI) inflation be a benchmark for monetary policy-making?
The CPI data series is only three years old. With three years of data, you can't do any analytical work. You need minimum 10 years of time-series data to look at various aspects -- like causality effects –- for meaningful policy use. To use the CPI as a core inflation benchmark for policy purposes, I think, is not possible now because it does not have the time series. It can be used as a descriptive index but not for policy purposes.
Q: Even after ten years, will the CPI still be a good gauge of inflation for monetary policy-making?
I think even after a decade, the CPI will still be a lousy measure for monetary policy-making in a country like India. This is because of the very high weightage given to food and fuel items in the CPI. While food items have a 49.71% (rural and urban combined) weightage in the CPI, fuel items make up for 9.49%. In other words, nearly 60% of the weightage is on primary products, which are not particularly sensitive to monetary policy. Moreover, the CPI is much more geographically sensitive than the WPI (wholesale price index), which means localised inflationary processes arising out of structural problems will show up in the CPI but not in the WPI.
Unlike WPI, CPI captures services but mostly those which are truly retail in nature, and many as input services for goods sold in retail.
Q: Even core inflation as measured by the WPI and the CPI shows a wide divergence. How do you explain that?
There is a lag effect. One has to look at the composition of the product basket. The CPI is not a measure of inputs but of final goods, whereas the WPI captures both inputs and final goods. Within a value chain, you can have some items where there