CPI AND WPI – SITTING ON A SEE-SAW

The house-help had a pretty austere Diwali celebration this year. With the price of almost all household goods higher than what it was last year, with vegetables continuing to remain expensive and fruits getting out of bounds for most, she is wondering how can she cope up with life?  On top of that she has to contend an ever increasing electricity bill. She says she does not save a single penny despite having taken up two more extra jobs. And this is not an isolated example….this is the story across India.  For people who had earlier climbed up a rung on the economic ladder, they have all come down two rungs, wondering what went wrong.

When this is the real, bitter truth at the grass root, one cannot help but wonder about the relevance of the Wholesale Price Index (WPI), which is on the verge of dropping into negative territory at 0.16% for Oct v/s 0.33% in Sept. The WPI prices are actually coming down though we are paying much more! And in the coming months, WPI is expected to only further decrease. On the other hand, the Consumer Price Index (CPI) hit a 16-month high at 4.62% in October.

So it makes you wonder whether these price indices, especially WPI hold any relevance at all? The big question which vexes all – why this huge difference between the CPI and WPI? Well, looking at things from an economic perspective, WPI is the measure of price of manufactured goods but does not measure services. It was originally supposed to measure the price at the factory gate but it is now more a measure of prices at the wholesale mandis. It includes a basket of 676 commodities, covering onions to chemicals and capital equipments. CPI tracks retail prices paid by consumers for finished products. There is a major difference between the WPI and the CPI as the prices differ due to subsidies, taxes, distribution costs.

In WPI, manufactured goods have a weightage of 65% and this includes chemicals, metals and machinery. Fuel (Petrol, Diesel and LPG) weightage is at 13% and primary articles at 23%, which includes food (Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish, etc) and non-food items (Oil Seeds, Minerals and Crude Petroleum). The price of these products has been down and that could explain why WPI is down.

On the other hand, food, which is what pinches most for people like you and me, which affects the common man, has a 54.18% weightage in CPI and services at 27%. Thus based on this barometer of the WPI, naturally, an increase in food prices would not get reflected in the WPI. When price of metals, cotton, capital goods have all slipped so low, some even in the negative, little wonder then that WPI is showing a deflationary trend, though price of onions are currently touching the sky.  CPI is inching up as on the ground, retail price of manufactured goods remain high due to supply bottlenecks.

The best part – RBI does not use the WPI data for any policy decisions. So what is the relevance of this WPI data today? With CPI and only CPI being the focus of attention, wonder when this data will stop being even announced?

But coming back to brass tacks, does this divergence matter to the common man or the scores of house helps and drivers, gardeners and the likes across India? Not at all! For them CPI or WPI holds no relevance – for them and us, the only thing that hurts is the high cost of living. No amount of FDI or cutting corporate tax or persistent attempts to appease the stock markets will help – hope the Govt realises this simple truth.