Economic questions rarely get people involved. Exceptions are inflation and unemployment. In that sense, these aren't abstract at all and inflation has affected electoral outcomes, and might do so again.

Bibek Debroy and Laveesh Bhandari

Abstract economic questions rarely get people involved. Exceptions are inflation and unemployment. In that sense, these aren't abstract at all and inflation has affected electoral outcomes, and might do so again.

There will be consensus that inflation is a socio-political issue now, though people often misunderstand inflation, which is a rate. If the inflation rate declines, that doesn't mean prices decline. It only means the rate at which prices are increasing has dropped.

Because of this perceptional problem, there is questioning of government data, though such data should be questioned because of other reasons. An inflation index requires identification of commodities, collection of price data for these items, assigning weights to the basket and aggregation.

That is, an inflation index is an average indicator and often, weights used in the average indicator don't match weights we assign to items. Food products are an instance.

Broadly, India has the wholesale price index (WPI) and three different versions of consumer price index (CPI). Since the objectives, base years, baskets and weights vary, they lead to variations in inflation figures.

Globally, CPIs are used to determine policy-formulation. However, primarily because of time-lags, India uses WPI and the inflation rate reported in newspapers is the point-to-point WPI, which is a function of what the price level was at that point in time the preceding year.

There are now proposals to extend coverage of WPI by including more goods and services so that it becomes a producer price index (PPI). But this won't work until systemic improvements occur.

There are problems with each of the steps involved in constructing an inflation index, including the administrative system of government price information.

How much is inflation in India? WPI and assorted CPIs show different trends and one isn't always invariably above the other. However, especially in 2008-09, the gap between the two has broken away from past trends and WPI-based inflation is far above CPI-based inflation.

It is often said inflation is a regressive tax, since it redistributes from relatively rich to relatively poor. Wage-indexation for inflation and employer-employee relationships are both lower among poor.

In addition, there is the question of whether the poor pay relatively more or less for similar items, for instance, bulk purchases as opposed to loose purchases. World Bank, believing the former, has recently increased the international poverty line to $1.25 per person per day, at 2005 prices.

Asian Development Bank (ADB) believes the latter, since poor tend to purchase inferior products of the same category. For other reasons, ADB's international poverty line is now $1.35 per person per day, at 2005 prices again.

India's poor are primarily in rural India. There are no ready indices for below the poverty line (BPL) inflation, among the three CPI measures that exist. One can argue that Bharat's consumer inflation is captured in CPI-agricultural labourers (AL), while India's inflation is captured in both CPI-urban non-manual employees (UNME) and CPI-industrial workers (IW).

From 2000-01 to most of 2005-06, CPI-AL was far below the average of CPI-UNME and CPI-IW, though for a brief period in 2003-04, the former did approach the latter. However, since 2006-07, Bharat's inflation has been far higher than India's inflation, reinforcing the point about poor suffering more, that is, poor in rural India suffering more.

This can be probed more by constructing a BPL inflation index for rural India. Amaresh Dubey of JNU and Sumita Kale of Indicus Analytics have conducted such an exercise.

The state-level rural poverty line given by the Planning Commission for 2004-05 is used and price data are from CPI-AL, available for five major product groups—food, fuel and light, clothing (with bedding and footwear), pan, supari, tobacco and intoxicants and miscellaneous.

The poverty line is the government one. The price data are government ones. What differs in the index, as opposed to CPI-AL, is the weights and aggregation. The point is simple.

Since poor spend relatively more of expenditure on these items and since these items have shown higher price increases, BPL inflation is likely to be more. Data used are thus official.

In how many states is inflation rate for rural poor higher than that for rural non-poor? The answer reinforces our a priori impressions. This number has gone up dramatically since 2006-07.

In 2006-07, inflation for rural poor was higher than for rural non-poor in every major state other than Karnataka, Kerala and Tripura. In 2007-08, inflation for rural poor was higher than for rural non-poor in every major state other than Rajasthan.

In either 2006-07 or 2007-08, inflation rate for rural poor was at least one percentage point or more higher than that for rural non-poor in Orissa, Uttar Pradesh, Tamil Nadu and West Bengal and approached 1 per cent in Himachal Pradesh, Maharashtra, Punjab, Haryana and Karnataka. The poor are whining, not from reforms, but from inflation.

Two questions follow. First, what does one do about this? Second, why is there this variation across states? The answer to the former is more reforms, not less- through greater income generating opportunities and scrapping of controls that prevent dis-intermediation in agriculture.

The answer to the latter is probably mismatches between production and consumption centres and inefficiencies (including the public distribution system) in allocation. The government is right about the symptoms; but has misdiagnosed the disease.

And therefore the treatment. Monetary policy is not the right mechanism to fight inflation. The answer lies somewhere else. Of course, point-to-point WPI-based inflation will automatically decline now.

This isn't because of what the government has done, but in spite of the government. And despite the WPI-based inflation rate dropping, the poor continue to suffer.

—Debroy is Research Professor, Centre for Policy Research, and International Management Institute. Bhandari heads the economics research firm Indicus Analytics.