BECAUSE THAT’S WHAT WE DO IN EXAMS
An Economics Statistics exam, where you are too short pressed for time (believe me I’d rather race Usain Bolt, and coming from me, that is saying something) is the last place where you’d have an epiphany, right?
Well, wrong. Amongst a flurry of formulae and calculating the inflation adjusted principal of an Inflation Indexed Bond, I got stuck on whether to use the CPI or the WPI for calculating the Price Escalation for a Chinese Contracting Company.
The inspiration for this article was actually what got me a 0 on 10 on the question! But, it enabled me to write this, so I guess it wasn’t a total loss.
Raghuram Rajan, after becoming the RBI Governor, in a significant move, switched from WPI (Wholesale Price Index) to CPI (Consumer Price Index) as the index for measuring inflation.
For those of you to whom this is Greek, these are basically indexes (that’s formulae for you) to calculate inflation. WPI is based on wholesale prices as opposed to CPI, which is based on consumer prices (duh!). Now this sparked off a lot of debate, so let’s see what made him take this major step:
WPI ignores the prices of services, like healthcare and education, which are taken into account by the CPI. And seeing as services account for more than 60% of our GDP, CPI’s case is definitely stronger.
WPI assigns more weight (importance) to fuel and metals and less to food, which is the complete opposite of what CPI does. As it is, food comprises of a greater proportion of consumer expenditure, so it’s only fair it be given more weight. Also, sharp fluctuations in international prices of metals could increase WPI unncecessarily, painting the wrong picture.
The CPI base (a relatively stable year to which all current values are compared) has been reworked to 2012, as opposed to 2004-05 for WPI, which makes the CPI more accurate. And ultimately, it is the consumers who are affected by inflation so it’s only fair that retail prices should be used as an index of measurement of inflation.
Also, this move would act as a cushion against any kind of turmoil in the financial market, whatever be its limitations.
- CPI is said to overstate inflation, which could be misleading.
- WPI is relatively easier to calculate, owing to the easy availability and credibility of data.
- CPI results in tightening of the economy and money market.
Economics apart, I’m pretty sure a lot of Indian economists were aware of all these facts well before Raghuram Rajan became the RBI governor and some might even have thought of implementing them. But why did it never happen before?
OF CONSTANTS AND COMFORT
We humans chase one thing – perfection. Have the perfect life, the perfect goal and the perfect way to reach there. We like constants. After all, they are what make us feel safe and secure. We also like routines and schedules; things which have a certain stability attached to them. And if anything interferes with that stability, messes up that intricate balance, we tend to panic. But we forget one thing, CHANGE is the only constant.
IT’S GOOD TO BE DEAF AT TIMES
I recently came across the expression ‘Rock the boat’, which is defined as ‘to disturb a situation that is otherwise stable and satisfactory’. Also, ‘to do things differently to the point of causing an uproar in society’, which is the closest to a non-negative definition. We probably would have been sitting at WPI derived inflation today, which could very well go below 0 (what?) if this ‘Inflation Hawk’ hadn’t intervened. He also faced a lot of criticism by economists for slashing interest rates under pressure by 0.5%, the highest cut in 5 years. He says he was focusing on Indian consumers and sutainable development and had the future of India in mind.
The society will say what it wants to. People are there to put us down and tell us that it’s wrong. Why can’t we turn a deaf ear to them? It’s our freaking boat, isn’t it? Take that chance before it sails away. You can’t expect to have an extraordinary, or even an ordinarily satisfying life with without a few minor hindrances, can you? Be different. Don’t be scared of messing up. Who knows what wonders lie ahead? So gear up, get up, and rock the boat. Or just do what you do.
For more information, read this.