Rebooting Inflation

What will change
Currently, a basket of 435 commodities ranging from food items such as rice and wheat to petroleum products and medicines, is used in the Wholesale Price Index (WPI) to determine inflation. To make the index more relevant, over 250 new items, such as mineral water, cellphones, perfumes, digital cameras, computer stationery, LCD TVs, among others, will figure in the new index. Most of these would fall in the manufacturing and transportation basket. The new inflation series will do away with close to 25 obsolete items like typewriters and video cassette recorders. Also, the base year of the new index would be shifted from 1993-94 to 2004-05.

Why the change
The new inflation series will better reflect the prevailing price trends and will be more useful for policymakers, including mandarins in the Reserve Bank and Finance Ministry. "We have sent our recommendations to the Central Statistical Organisation, which is evaluating the series. It will reflect the true picture of the price movement in the economy," says M.C. Singhi, Economic Adviser at the Ministry of Commerce and Industry.

The likely impact
Experts think that switching the base year would result in inflation going up by about one percentage point but the Consumer Price Index (CPI) may be more relevant for consumers. "The new WPI will not include the services sector. The upgraded CPI inflation data series will give a more realistic picture," says D.K. Joshi, Chief Economist at CRISIL rating agency.