The Indian government\u2019s outgoing chief economic adviser Kaushik Basu has said inflation is a \u201cpartially-understood discipline\u201d. I bet he is a bit generous in his assessment. The ideal way of putting it could have been inflation in India is a \u201chardly understood\u201d or a \u201cmuch misunderstood\u201d discipline. In the past three years, many\u2014including Basu himself and India\u2019s central bank\u2014have gone wrong in their projections of the inflation trajectory. Now, the Reserve Bank of India (RBI) seems to be opening a new front on the inflation debate\u2014what inflation trend should it look for to formulate monetary policy? Wholesale? Retail? Or, the so-called core, or non-food and non-oil, inflation? Which inflation index should RBI target?
\nRBI governor D Subbarao.
\nTo be sure, RBI governor D. Subbarao has all along positioned himself as an inflation fighter, and not as an inflation targeter; but that doesn\u2019t iron out the complexities that surround the inflation debate. In February this year, at an international research conference of RBI, Subbarao had said that the central bank can\u2019t be an inflation targeter, or a core inflation targeter, as that will not serve the best interests of the macroeconomic management of the country. At the same time, he had mentioned that the government had never been insensitive to inflation, and inflation management usually takes precedence over growth concerns. Before that, in August 2010, while delivering the 10th C.D. Deshmukh Memorial Lecture, Subbarao had said RBI cannot be, and, indeed, should not be, a pure inflation targeter. \u201cIn an emerging economy like ours, it is not practical for the central bank to focus exclusively on inflation, oblivious of the larger development context. The Reserve Bank needs to balance between growth, price stability and financial stability.\u201d
\n\u201cOur headline inflation index is WPI (Wholesale Price Index) and that does not, by definition, reflect the consumer price situation,\u201d he said. \u201cGetting a single representative inflation rate for a large economy with 1.2 billion people, fragmented markets and a diverse geography is a formidable challenge.\u201d
\nNobody says it\u2019s a cakewalk; but it\u2019s frustrating to see on such a critical issue, policymakers continue talking in different languages, pointing to different directions and creating confusion in the market. Early this month, C. Rangarajan, former RBI governor and economic adviser to Prime Minister Manmohan Singh, said falling core inflation will give room to RBI to cut its key rates. \u201cI believe if the inflation rate, particularly non-food manufacturing inflation, shows signs of decline, there will be scope for RBI to adopt an easier stance,\u201d Rangarajan said on the sidelines of an event in Delhi.
\nIf indeed this is the case, why did Subbarao last week take pains to explain why core inflation should not be the sole focus of RBI? Core inflation excludes food and fuel, which constitute 50% and 15%, respectively, to the consumption basket. \u201cCan a measure of inflation that excludes them be called core?\u201d Subbarao asked. The inflation in fuel and certain protein food items has been persistent in the past three years. \u201cCan a persistent component be excluded from the core measure?\u201d Subbarao asked. RBI insiders say the central bank these days is increasingly focusing on retail inflation while making policies. Which is why the possibility of a rate cut is not too bright at this moment.
\nRetail or Consumer Price Inflation (CPI) in June eased marginally but remained in double digits because of high food prices. The annual inflation based on all-India general CPI (combined) for June stood at 10.02%, marginally lower from 10.36% for May. Retail inflation rates for rural and urban areas for June were 9.74% and 10.44%, respectively. These are provisional figures. The comparable final figures for rural and urban areas for May were 9.57% and 11.52%, respectively.
\nInflation, as measured by WPI, slowed to its lowest level in five months in June\u20147.25%\u2014following a drop in the prices of some fuel items. Wholesale prices rose 7.55% in May. The core inflation remained unchanged at 4.8% in June.
\nSubbarao made two critical statements from two different platforms last week. First, he said the inflation threshold is 5% for India and right now \u201cwe are way above that threshold\u201d, while launching a book of essays by former RBI governor, the late I.G. Patel. The next day, speaking at the Statistics Day Conference in RBI\u2019s Mint Road headquarters, Mumbai, he said core inflation might not be a true indicator of price movement in Indian conditions.
\nHe is in favour of moving towards developing and using a Producer Price Index (PPI) to gauge inflation more accurately. WPI does not capture the price movement of services and is a hybrid of consumer and producer price quotes. Sellers\u2019 and purchasers\u2019 prices differ due to government subsidies, sales and excise taxes, and distribution costs. \u201cFor these reasons, it is desirable that we move towards developing a PPI that measures the average change over time in the sale prices of domestic goods and services,\u201d Subbarao said.
\nNobody can find fault with the governor\u2019s argument. But till such time PPI is developed, both the government and the central bank need to figure out how to bottle the inflation genie. We can continue to analyse the different inflation indicators and dissect the different components of inflation till the cows come home; but that will not in any way help the corporate borrowers, who want the cost of money to come down, to make investments that will fuel economic growth, and the savers who want higher returns on their savings to protect the value of money from being eroded.<\/p>\n","protected":false},"excerpt":{"rendered":"
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