Introduction

JIW

The Journal of Income and Wealth

0000-0000

Indian Association for Research in National Income and Wealth

jiw-25-1and2-004

RESEARCH ARTICLE

Joshi

Ajit R.

Mitra

Sharmishtha

Department of Statistical Analysis and Computer Services, Reserve Bank of India, Mumbai

JEL Classification: E31

1–122003

251–24353

Introduction

In the Indian economy, three major indicators of inflation rate are Wholesale Price Index (WPI), Consumer Price Index (CPI) and Gross Domestic Product implicit deflator (GDPD). Of these, WPI is compiled at weekly frequency and is released within two weeks of the close of the week. Due to the timeliness and frequency, this has become the most important indicator, in spite of its limitations in terms of coverage. Over the last few years, the inflation rates based on all these measures have varied widely. Among these three, WPI and GDP based inflation rates are the representative of the overall price variation in the economy and therefore are expected to exhibit close relationship. In this background, this study examines the sources of divergence of the price indices and the nature of relationship between GDP deflator, CPI and WPI–at the aggregate level. Further, it has also explored the divergence of inflation rates based on GDP deflator and WPI at the disaggregate level for ‘Agriculture’ and ‘Industry’ components, while disaggregate level for ‘Services’ under GDP has been compared with overall WPI and CPI_IW.

Methodology

In order to assess the sources at the disaggregated level, the data on value added at the levels below aggregate level were used. For Agriculture and Allied Activities, data on “value of output” is available at the commodity group level compatible with WPI. For Manufacturing, the “value added” data are available at two-digit level of commodity classification, which is compatible with WPI. The use of two different indicators for these two sectors is in line with the methodology for working out constant price estimates. In Agriculture, double deflation method is used, where value of output and value of input are both deflated using relevant deflator. In Manufacturing, the Gross Value Added is deflated using WPI. Therefore, these two data series were considered to study the divergences. The implicit deflator for each of the commodity group was computed using the constant price (1993–94) and current price output/value added.

Analysis at aggregate level

WPI-All Commodities (base 1993–94=100) and CPI-Industrial Workers (base 1982=100) have been considered for that category of inflation rate, which is directly observable from these two price indices. For the GDP deflator, we have considered GDP at Factor Cost at 1993–94 prices (for the constant price estimates) and compared those with their current prices counterpart. Annual data from 1990–91 are considered for all the three indices; hence annual average The Journal of income and wealth, Vol. 25, No. 1 & 2, January-December 2003 inflation rates from the series are derived from 1991–92 onwards up to the latest (available up to October 2004) information.

It may be seen that at the aggregate level, there are a number of time points, when the inflation rates based on these two indices have shown wide divergence. However, since 1999–2000, GDP deflator and CPI-IW based inflation rates have moved at tandem, while the official rate of the economy has shown periodic divergences of significant magnitude.

Agriculture and Allied Activities

In the agricultural sector, the commodities are grouped into 10 groups viz. (i) cereals, (ii) pulses, (iii) oilseeds, (iv) sugarcane, (v) fibres, (vi) tea, coffee and tobacco, (vii) condiments and spices, (viii) fruits and vegetables, (ix) milk and (x) meat, fish and eggs. Wholesale price index for these commodities and the GDP deflator (worked out using the “value of output”) are compared at the growth rate level. It is seen from the comparison of the inflation rates based on these two price indices, that there is considerable difference in inflation rates for many commodities over the study period. In respect of cereals, pulses (to some extent), oilseeds, fibres, condiments and spices and milk, the direction and quantum of movements in inflation rates is comparable between the two series, making the graphs of the two inflation rates move close to each other. However, in terms of absolute variation, the difference between the inflation rates exceeds 2–3 percentage points on the average for these commodities (Annex 1, Charts 1(a) – 1(i)).

In respect of the remaining commodities, viz., sugarcane, tea, coffee and tobacco, fruits and vegetables, and meat, fish and eggs, the variation is far more with differing directions in movement of inflation rates for many years.

This wide variation might get cancelled out somewhat during aggregation, but at the aggregate level, i.e. at “Agriculture and Allied Activities”; the difference between inflation rates is of the order of 3 percentage points on the average.

Manufacturing

In the registered manufacturing sector, similar exercise was carried out using “Gross Value Added”. For comparing the inflation rates for different groups of the major group ‘Manufactured Products’, we have considered corresponding categories of the Registered Manufacturing sector of the economy. Inflation rates based on the 2 indices for the 12 comparable groups of the Manufactured Products/Registered Manufacturing Sector and Electricity have been presented in Table 3. Such comparison has also been presented graphically to bring out the picture more vividly. Table 1

Inflation Rates from CPI_IW, WPI_AC and GDP_Deflator

Year	Inflation rate based on

	CPI_IW	WPI_All	GDP_Deflator

1991–92	13.48	13.73	13.81
1992–93	9.98	10.05	8.72
1993–94	7.17	8.34	9.59
1994–95	10.27	10.87	9.43
1995–96	9.96	7.99	9.03
1996–97	9.43	4.62	7.44
1997–98	6.84	4.38	6.67
1998–99	13.13	5.95	7.94
1999–00	3.42	3.31	3.94
2000–01	3.82	7.09	3.49
2001–02	4.32	3.66	3.88
2002–03	3.97	3.38	3.46
2003–04	3.86	5.48	3.67

Table 2

Inflation Rate From Agriculture And Allied Activities

Year	Measure of Inflation based on		Difference

	GDP-Agriculture & Allied Activities	WPI-Food & Non-food Articles

(1)	(2)	(3)	(4)=(3)−(2)
1991–92	18.87	19.56	0.69
1992–93	5.43	8.54	3.11
1993–94	10.59	6.07	−4.52
1994–95	9.71	16.09	6.38
1995–96	9.83	8.48	−1.35
1996–97	7.97	8.34	0.37
1997–98	8.49	2.86	−5.63
1998–99	7.2	12.04	4.84
1999–00	4.9	1.17	−3.73
2000–01	1.83	2.84	1.01
2001–02	4.09	3.6	−0.49
2002–03	3.62	3.41	−0.21
2003–04		4.31

Table 3

Inflation Rates from Manufacturing Products and Electricity

Year	Measure of Inflation Rates based on

	WPI-Mfg Products	GDPD Regd Mfg Sector	Difference-Mfg.	WPI Electricity	GDPD Electricity	Difference-Elec

1991–92	11.32	12.09	0.77	10.91	11.35	0.44
1992–93	10.9	9.78	−1.12	11.73	18.66	6.93
1993–94	7.8	5.78	−2.02	27.84	9.98	−17.86
1994–95	12.27	10.38	−1.89	13.6	15.64	2.04
1995–96	8.55	8.2	−0.35	12.5	9.23	−3.27
1996–97	2.08	4.03	1.95	4.46	1.83	−2.63
1997–98	2.87	2.65	−0.22	13.71	9.6	−4.11
1998–99	4.36	5.22	0.86	3.55	17.35	13.8
1999–00	2.74	2.23	−0.51	7.46	−11.14	−18.6
2000–01	3.17	6.55	3.38	18.44	−3.56	−22
2001–02	1.92	2.65	0.73	12.38	−1.26	−13.64
2002–03	2.65	3.13	0.48	5.85	3.28	−2.57
2003–04	5.64			4.55

It is observed that most of the sub-groups of the ‘Manufactured Products’ show little dissimilarities in the beginning of the observed period and almost identical values thereafter, with the two graphs colliding to a single line diagram. However, moderate differences in the groups ‘Food Products’ and ‘Textiles’ and major disturbances in the group ‘Rubber & Plastic Products’ have led to some divergences to the major group ‘Manufactured Products’ as a whole. The two inflation rates have shown widely varying pattern and values for the group ‘Electricity’ possibly due to the high adjustment for FISIM in the corresponding GDP series.

Services

For most of the service categories, the constant price estimates are worked out using respective quantum indices and these are valued at base year prices. This method is expected to give an appropriate price deflator for these sectors. As the prices of these sectors are likely to vary out of alignment with the general commodity price level, the source of divergence between GDP deflator and WPI should ideally fall in this sector. Movement of individual sector price indices and their comparison with other price indices, viz., WPI and CPI needs to be carried out so as to understand the particular sectors which are likely to be the source of divergence between overall WPI and GDP deflator based inflation rates. Inflation from the combined services covered under GDP, overall GDP, WPI and CPI_IW are presented in Table 4. Table 4

Inflation Rates From Gdp - Services

Year	Inflation rate from

	GDP-Services	Overall GDP	WPI-All	CPI-IW

1991–92	12.68	13.81	13.73	13.48
1992–93	9.10	8.72	10.05	9.98
1993–94	8.91	9.59	8.34	7.17
1994–95	8.90	9.43	10.87	10.27
1995–96	8.80	9.03	7.99	9.96
1996–97	7.50	7.44	4.62	9.43
1997–98	5.36	6.67	4.38	6.84
1998–99	8.17	7.94	5.95	13.13
1999–00	4.78	3.94	3.31	3.42
2000–01	4.22	3.49	7.09	3.82
2001–02	4.16	3.88	3.66	4.32
2002–03	3.18	3.46	3.38	3.97
2003–04	4.21	3.67	5.48	3.86

At the disaggregate level it is interesting to note that GDP deflator of services like, Public Administration, Defense, etc., Other Services and Community, Social & Personal Services track the aggregate level inflation from CPI_IW quite satisfactorily. This is probably because of the close linkage of such services to wage indexation, which again is directly determined by the CPI_IW. In other cases, inflation from GDP deflator is not conforming to any of the other two price indices. This is particularly disturbing for the financial sector where special care needs to be adopted in the context of various methodological issues. However, for the Construction sector, the comparison should ideally be made with the few relevant commodities (Iron & Steel, Cement, etc.) and not with the overall index of the WPI. In case of CPI_IW, comparison at its aggregate level is justified because of its direct relationship with labour costs.

Concluding Remarks

As already noted, a priori expectation that the source of divergence between inflation rates computed on the basis of WPI and GDP deflator should be the services sector. However, limited empirical investigation restricted to Agriculture and Registered Manufacturing sectors reflects that though in terms of manufacturing sector the divergence is relatively subdued, there is substantial divergence between GDP and WPI based inflation rate for agriculture. This aspect needs to be further investigated, so that appropriate methodological improvements can be made for working out constant price estimates of GDP and related aggregates.

Shri A.R. Joshi is Director and Dr. (Smt.) S. Mitra is Assistant Adviser in the Department of Statistical Analysis and Computer Services, Reserve Bank of India, Mumbai. The authors are grateful to Dr. K.S.R. Rao, Principal Adviser and Dr. R.B. Barman, Executive Director of the Bank for their valuable suggestions. Views expressed are the authors' own and not of the institution to which they belong.

<sec id="sec008"><title>Annexure 1

Table 1

Inflation Rates Based On Gdp Deflator And Wpi For Agricultural Commodities

Sub-Groups	Index	1991–92	1992–93	1993–94	1994–95	1995–96	1996–97	1997–98	1998–99	1999–00	2000–01	2001–02	2002–03	2003–04

Cereals	GDPD	27.97	4.75	7.37	9.38	8.63	12.74	0.91	15.03	4.10	−2.13	2.52	1.78
	WPI	23.21	13.59	5.50	13.65	6.28	12.36	1.99	9.04	17.79	−2.68	−1.69	2.01	1.61
Pulses	GDPD	6.87	6.95	21.70	5.80	17.12	5.08	−5.28	11.86	6.64	10.75	7.54	−5.32
	WPI	9.23	3.55	19.74	22.23	10.46	12.08	−3.61	9.78	3.77	8.07	5.40	−4.60	−1.82
Oilseeds	GDPD	12.24	−8.00	10.93	8.32	5.77	8.26	−1.67	8.37	−3.27	−0.78	0.10	20.99
	WPI	20.39	−1.89	−1.36	18.46	8.58	1.55	−1.75	15.69	−10.14	−3.23	6.58	16.40	10.79
Sugars	GDPD	3.86	25.67	23.75	5.61	−1.35	6.81	13.96	−0.16	1.06	9.19	2.57	7.74
Sugarcane	WPI	6.35	13.22	21.46	10.53	6.94	11.47	7.77	6.06	6.71	7.68	8.26	7.74	8.68
Fibres	GDPD	24.97	−17.81	46.48	30.42	−4.71	−2.74	8.35	−1.28	−0.53	1.76	2.98	−5.81
	WPI	38.85	−10.53	16.00	50.00	6.85	−14.13	9.71	7.12	−10.41	8.13	−3.40	−4.93	23.08
Indigo, dyes & tanning material	GDPD	−16.67	−14.29	16.67	22.22	9.09	−4.55	−4.59	16.67	0.84	−3.75	4.55	−1.79
Tanning materials	WPI	26.04	23.38	7.55	2.53	0.49	36.22	9.87	0.00	0.00	0.00	9.27	43.64	−0.75
Tea, Coffee, Tobacco	GDPD	5.17	6.40	10.65	−1.89	32.68	4.66	22.48	0.30	3.66	7.72	1.11	2.82
Other Food Articles	WPI	−9.05	10.21	12.29	11.63	15.44	−1.36	39.37	−8.27	−7.64	−14.98	−12.27	−2.74	−3.33
Condiments & Spices	GDPD	50.72	−1.32	−3.85	20.80	11.83	6.33	6.10	11.79	18.88	−15.36	−1.44	2.82
	WPI	46.80	23.10	−13.01	26.22	21.55	15.08	0.19	24.50	2.81	−10.53	−7.14	3.13	5.72
Fruits & Vegetables	GDPD	16.52	6.70	8.85	7.89	15.77	2.90	28.97	1.44	2.79	0.34	17.22	−0.32
	WPI	23.92	7.78	3.39	8.04	14.36	20.50	−4.05	29.76	−16.66	3.79	17.83	0.67	4.43
Milk	GDPD	18.62	9.77	7.58	9.78	9.64	8.09	7.15	6.58	4.83	4.42	1.53	3.31
	WPI	13.01	12.01	5.67	10.33	3.55	4.75	4.90	8.36	8.51	10.59	1.77	3.37	2.00
Meat & Eggs	GDPD	13.31	10.09	13.66	8.64	9.57	13.17	8.00	3.05	6.42	2.89	0.09	−6.76
Eggs, Meat & Fish	WPI	14.57	16.49	12.79	16.13	7.78	16.34	10.91	4.91	2.72	6.68	2.70	1.47	−3.28

Charts showing inflation rates for WPI and GDP Deflator for Agricultural Commodities

<sec id="sec009"><title>Annexure 2

Table 2

Inflation rates based on GDP Deflator and WPI for Manufacturing Sector

Sub-Groups	Index	1991–92	1992–93	1993–94	1994–95	1995–96	1996–97	1997–98	1998–99	1999–00	2000–01	2001–02	2002–03	2003–04

Food Products	WPI	13.54	8.52	10.22	9.64	3.26	6.06	7.77	11.20	1.05	−3.72	−0.18	5.25	8.87
Food Products	GDPD	13.28	7.02	7.85	11.30	3.68	5.73	9.25	17.49	1.27	−1.90	0.45	4.54
Beverages Tobacco & Tobacco Products	WPI	9.71	10.55	4.38	11.58	8.25	5.34	11.52	10.80	4.43	3.27	7.80	5.41	0.66
Beverages Tobacco & Tobacco Products	GDPD	9.76	10.43	4.39	18.30	8.31	5.29	11.54	10.75	4.47	3.28	7.77	5.41
Textiles	WPI	10.01	6.56	9.58	16.76	9.48	−8.29	−2.71	−0.90	0.50	4.24	−0.47	2.39	7.74
Textiles	GDPD	8.70	8.60	8.45	13.23	13.07	−3.80	−1.72	6.19	−1.23	1.79	−0.36	7.55
Wood & Wood Products	WPI	1.56	96.90	19.72	10.52	7.18	2.72	25.34	29.99	−2.56	−7.16	−3.10	2.68	0.18
Wood & Wood Products	GDPD	1.41	96.91	19.92	10.98	7.26	2.47	25.37	30.03	−2.42	−7.26	−2.95	2.61
Paper & Paper Products	WPI	17.58	19.08	5.37	0.64	23.70	−0.18	−3.22	3.18	14.18	10.80	4.44	0.74	−0.43
Paper & Paper Products	GDPD	17.64	19.06	5.44	6.10	23.65	−0.14	−3.29	3.21	14.16	10.79	4.47	0.71
Leather & Leather Products	WPI	4.28	−2.43	7.42	6.77	8.71	1.66	6.26	3.43	16.02	−3.39	−5.56	−7.74	12.90
Leather & Leather Products	GDPD	4.21	−2.49	7.50	9.68	8.66	1.70	6.27	3.39	16.06	−3.16	−5.80	−7.77
Rubber & Plastic Products	WPI	3.45	9.18	2.00	5.60	15.66	0.97	0.24	−0.62	−0.09	1.52	0.47	5.19	1.77
Rubber & Plastic Products	GDPD	10.05	12.03	5.74	6.21	8.00	7.50	6.24	1.22	6.10	23.59	3.91	5.87
Chemicals & Chemical Products	WPI	13.90	14.35	7.93	11.93	8.71	3.46	4.51	6.39	6.42	5.87	2.88	2.89	1.88
Chemicals & Chemical Products	GDPD	13.93	14.05	7.91	16.60	8.75	3.39	4.58	6.34	6.45	5.93	2.80	2.90
Non-Metallic Mineral Products	WPI	16.26	7.90	9.60	8.05	13.95	2.39	−1.84	2.50	−2.17	4.36	8.34	−0.40	3.41
Non-Metallic Mineral Products	GDPD	16.18	7.93	9.58	10.90	13.99	2.36	−1.85	2.53	−2.17	5.10	7.55	−0.43
Basic Metals Alloys & Metals Products	WPI	6.76	9.28	7.78	8.67	11.03	4.61	3.83	1.58	1.72	3.82	0.33	3.16	15.63
Basic Metals Alloys & Metals Products	GDPD	6.52	9.72	8.08	7.82	10.50	4.40	3.29	1.51	1.50	3.57	0.35	2.64
Machinery & Machine Tools	WPI	15.61	10.69	3.19	10.48	5.45	3.53	−0.37	0.61	0.10	5.87	5.02	0.92	1.87
Machinery & Machine Tools	GDPD	15.71	11.55	2.61	5.86	5.99	4.26	−1.75	0.53	0.73	5.94	4.95	0.99
Transport EquipMent & Parts	WPI	11.68	7.70	2.63	6.54	7.90	6.19	3.78	2.85	3.05	5.76	2.49	0.46	−0.07
Transport EquipMent & Parts	GDPD	11.65	7.67	2.64	7.40	7.92	6.21	3.82	2.81	3.05	5.91	2.37	0.47

Charts showing inflation from sub-groups/sub-sectors of WPI - Manufactured Products & GDP - Registered Manufacturing Sector; WPI - Electricity & GDP - Electricity

Charts showing inflation from GDP_Services & overall inflation from WPI & CPI

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