Economists are of the view that the new base year will change the trajectory of wholesale inflation as more items will get added and some will get removed
At a time when high wholesale price inflation is continuously hitting double-digits, the government can soon change the base year of the Wholesale Price Index (WPI) to 2017-18 from 2011-12. The move will help government capture the structural changes taking place in the economy making data more reliable.
The work on the new base year is at an advanced stage, with the government currently seeking approval of various committees, Business Standard reported.
The Department for Promotion of Industry and Internal Trade (DPIIT) had in June floated a draft technical report of a working group, which recommended revising the WPI base year to 2017-18 and proposed the addition of about 480 new items such as medicinal plants, pen drives, lifts, gymnasium equipment, and certain motorcycle engines in the new series.
With this, the WPI basket, which currently has 697 items, would have 1,176 items.
Just like the current series, all commodities will continue to be categorised into three major groups: primary articles, fuel and power, and manufactured products.
Currently, primary articles account for more than a fifth of the entire wholesale price index. Fuel and power have a weightage of 14.9 per cent, while manufacturing products account for nearly 65 per cent of the index. Several improvements have been introduced in the new series.
WPI inflation rose to 13.11% in February from 12.96% the previous month.
The wholesale inflation rate, measured by WPI, is a crucial measure to capture the dynamic price movements in commodities for bulk buy by traders. WPI inflation has remained double-digit for the 11th consecutive month starting April 2021. WPI inflation in the same month last year was 4.83 per cent.
How change in base year would impact inflation numbers?
Economists are of the view that the new base year will change the trajectory of wholesale inflation as more items will get added and some will get removed, changing the share of the commodity group. However, it is not clear whether this would bring inflation down or push it upwards. One thing is clear: it will make the data more reliable.
“If you have a situation where a commodity group, whose weight has gone up, has higher inflation, it could push inflation up and vice versa. It will change the inflation trajectory to make it far more accurate,” said Pronab Sen, India's former chief statistician.
The revisions in the base year are “necessary and in fact essential” to capture the structural changes in the economy, Sen said. “The old base will not pick up the current structure, therefore the estimate of inflation will be biased.”
The current WPI base year is a decade old now. The story is the same for the Consumer Price Index (CPI), which measures retail inflation, and is a policy anchor for the Reserve Bank of India’s Monetary Policy Committee.
"We should have been working on the second revision at this stage, so there is no question whether the base year has to be changed," Sen said.
While the government seems to be doing the final leg work for the WPI base year, a revision in the CPI base year may take longer.
“The CPI can only be changed if the household consumption survey takes place,” said Sen.
The government had conducted the Consumer Expenditure Survey in 2017-18. However, in 2019, the government scrapped the report citing “data quality” issues.
"The government objected to the data because it showed poverty had gone up and therefore the data was suppressed," Sen added.
Any changes needed for the CPI will be known once a fresh consumption survey is conducted by the government. Economists have warned that leaving the base year unchanged could make inflation data unreliable.
"When the consumption basket changes, the inflation also changes. So, it is an attempt to try and better reflect what the consumer is facing in terms of inflation,” said veteran economist Arun Kumar.
“If we carry on with the old weights, we are not reflecting the correct WPI or CPI," he added.
Would base year revision impact RBI's monetary policy?
The official target of the monetary policy is CPI inflation. However, there is always a risk of high wholesale prices feeding into retail inflation, which is why it cannot be completely ignored either.
While wholesale inflation is in double-digits, CPI inflation rose marginally above the RBI’s tolerance limit to 6.07% in February.
The inflation anchor of the new Monetary Policy Framework (NMF) is 4 per cent, with a band of +/- 2 per cent.
“The divergence between WPI and CPI is a matter of concern,” said Lekha Chakraborty, a professor at the National Institute of Public Finance and Policy.
Chakraborty said the revision in base years may not be important for the MPC.
“The pass-through effect of WPI on CPI, given the rise in prices for inputs, is crucial here,” she added.
Given the volatility in energy prices and global uncertainties from the Ukraine crisis, inflationary pressure would continue to mount. However, the RBI may find itself in a tricky position as a rate hike could hurt the growth recovery.
While a revision in the WPI base year may not be of material use to the MPC, the move will help make GDP data more robust as wholesale inflation has a bigger share in GDP deflator, which is used to arrive at real GDP from nominal GDP.