Rural folk reel under price onslaught

The consumer price index numbers for March 2009 have been released after an inordinate delay and covey a tale far different from what is portrayed by the official wholesale price index.

Instead of low inflation and even the prospect of deflation, the spectre of a price spiral looms large.

The index for working class has hardened by 8.03% during the month on a point-to-point basis; compared with the year-ago rate of 7.87%, there has been an acceleration of sorts in this representative index for industrial workers.

In rural India, the price situation is dire, with the index for agricultural labour ruling 9.46% higher than what it was in March 2008 — 7.91% — and the index for rural labour advancing by 9.69% from 7.63%.

The behaviour of these three retail indices presents a stark contrast to the wholesale price index; during the last week of March 2009 , the WPI-based inflation rate has decelerated sharply to a mere 0.26% from 7.75% during the same week of 2008.
Beyond doubt, the signs of pronounced moderation in inflation as judged from the WPI are conspicuously absent at the level where it matters most — the masses.

In fact, in its latest annual monetary policy enunciation, the Reserve Bank of India had admitted that the transmission of what was happening in regard to the wholesale index to the retail segment is a serious issue.

Far from converging, the inflation rates based on WPI and CPI are poles apart.
The point-to-point comparison underscores the disconnect between the two indices. The same trend is evident even if we measure the inflation rate using the average data. In the case of inflation based on the WPI, the rate has galloped from 4.61% in 2007-08 to 8.44% in 2008-09. At the retail price inflation, this pace is even quicker.

For the industrial workers, the annual inflation rate has jumped to 9.02% from 6.40%, for agricultural labour to 10.02% from 5.41% and for rural labour to 10.27% from 5.14%.

It is fair to say that the common man in both urban and rural India is contending with an inflation rate of 10% or thereabouts, and he is unlikely to repose much faith in the low weekly inflation figures, deduced from the wholesale price index.

Consumer price inflation is thus disconcertingly high but what makes the situation grim is that it is most acutely felt by those classes of the population who are most defenceless — the rural folk — as they have a double-digit inflation to cope with while eking out a bare living.

On the other hand, the havoc played by inflation on the industrial workers is made somewhat bearable because they enjoy the benefit of indexation via the increase in the dearness allowance component of their wages consequent to the spurt in the index for working class.

Inflation measurement, taking recourse to the WPI, is problematic in that this index tracks the producer prices while what is relevant for the masses is what they pay at the retail level.

Moreover, the WPI excludes services on which people expend a lot of money. In the consumer indices, services have a representation, however inadequately, and this does impact the inflation rate.

Perhaps, the serious flaw is the low weight accorded to food items —- on which a sizeable portion of the family budget is spent — in the WPI — a scant 27%. On the other hand, food accounts for a weight of 69% in the index for agricultural labour and for 57% in the retail index for working class.

It is no accident that, while the point-to-point inflation rate has slumped to 0.26% in the last fiscal from 7.75% a year earlier, the food inflation within the WPI has been quite high -6.8% and only fractionally lower than the rate of 7.7% as of end-March 2008.