Reserve Bank of India (RBI) Governor D. Subbarao, on Friday, proposed yet again the need to develop a series of Producer Price Index (PPI) that would “help gauge how price momentum builds up in the economy.”
“As far as inflation measures go, the problem in India is not of deficit, but of excess. Ours is a tale of many indices,” said Dr. Subbarao, while speaking on ‘RBI’s Policy Making Conceptual and Empirical Issues’, at the 7thStatistics Day conference of RBI here.
He was referring to the several indices which are considered while measuring inflation in the country: Wholesale Price Index (WPI); Consumer Price Index (CPI) (Industrial Workers); CPI (Agricultural Labour); CPI (Rural Labour); CPI (Urban), CPI (Rural) and CPI-combined.
,He said determining the appropriate inflation measure to be used for the purpose of calibrating monetary policy was critical.
He said that the inflation dynamics that the WPI and CPI projected were quite different.
“This results in considerable divergence between the CPI and WPI, at least, in the short-term,’’ he pointed out.
The traditional practice in the RBI had been to use WPI as the headline measure of inflation. However it also studied trends in CPI inflation and the findings of household inflation expectation surveys for calibrating monetary policy, he said.
Several analysts have argued that the use of WPI inflation by the RBI was flawed on the ground that in India, the WPIdid not adequately capture the movement in the prices of services, which constituted close to 2/3rd of India’s economic activity.
Further, higher transaction costs and taxes were reflected in the CPI but not in the WPI, he said. Regardless of the reasons, “the large magnitude of the short-term divergence between the two indices poses a major challenge for assessing inflation dynamics in the short-term,” he added.
The RBI governor also said that post the financial crisis, the challenge of preserving and bolstering financial stability had come into the spotlight.
“We now know that price stability and macro-economic stability do not necessarily guarantee financial stability, and that financial stability needs to be pursued as a policy objective in its own right,” he said.
This post-crisis thinking had presented statisticians with a new set of challenges—that of developing additional matrices to monitor financial stability.
“Indeed”, he said “the crisis has highlighted the importance of developing relevant statistics that are timely, internally consistent, and comparable across countries.”
In India, the RBI started publishing Financial Stability Reports in March 2010, and had issued seven reports so far.
Dr. Subbarao said that considerable research effort should be devoted to development of indicators for financial stability analysis, which, in conjunction with sound judgment, must be employed for comprehensive assessment of the risks to the stability of the economy, and the financial system.