What is a better indicator of inflation, WPI or CPI and why?
CPI is a better indicator of inflation than WPI. CPI is designed to measure the change over time in the level of retail prices of a basket of goods and services consumed by an average family of a defined population group.

In India, for the purpose of CPI, population is classified into three groups. WPI does not include changes in the prices of services. It is an indicator of movement in the prices of commodities in all trade and transactions. Prices reflected by the WPI are a mix of producer’s prices and wholesale market prices.

Ideally, inflation should measure prices at the -- final demand level -- and not only at the -- intermediate demand level -- . It should also cover all the goods and services consumed by consumers. CPI fulfils these requirements.

Why doesn’t India use CPI rather than WPI as a measure of inflation?
This is partly a legacy problem. But we must shift to using the CPI more. An important reason for India using the WPI is that getting wholesale prices is easier because of the existence of wholesale markets from where such information can be collected regularly and systematically. As a result, the WPI is compiled every week. The CPI requires a regular survey from a highly dispersed market which is quite difficult. This explains the monthly information collection in the CPI as against weekly in the WPI.

The WPI is also popular in India because it is released regularly with very short delays. It also provides commodity-wise details, which is found extremely useful by consumers who look for price changes across commodities.

Is there a direct relationship between money supply and inflation? Can the correlation be justified in the Indian context?
In theory, there is a strong relationship between money supply growth and inflation. If the growth in supply of goods and services don’t match the growth in money supply, then, simplistically put, the excess money supply would feed into inflation. The precise measures of money supply growth, mechanisms, measures of inflation and lags in the effects are a matter of empirical justification and ongoing research.

Empirically, and in the short- term, we find that the relationship between growth in money supply and inflation is low in India. Inflation is determined more by supply bottlenecks such as import restrictions and earlier production restrictions too, or monsoon problems. The decline in inflation in recent years is more a result of sufficient supplies and low barriers to imports. Money supply growth was above 17 per cent for most part of the year.

The decline in money supply growth came later in the year and inflation was beginning to rise around then. This is just a recent case. There have been many similar short-term anomalies in the past.

Is inflation artificially pegged in India ?
No.

Is inflation related to growth ?
Growth can be achieved with and without inflation. In a sense, this is a choice in the modern world.

What will be the impact of budget measures on inflation?
It is prudent to keep the budget deficit low to help keep inflation low. But the empirical relationship between inflation and budget deficits is even more difficult to establish than it is to establish the relationship between money supply growth and inflation.

If India were to attain an 8 per cent GDP growth, what would be the right level of inflation?
Till the 1960s, all the economists agreed that inflation and growth move together. However, this relationship came under heavy attack during 1970s and 1980s when the supply shock adversely affected most countries in the world.

In the 1990s when many of the countries globalised, they experienced high growth with lower inflation. Hence, economists now talk of growth with zero inflation. Thus, it is possible to obtain high levels of growth with very low inflation rates, provided we ensure that barriers to supplies -- domestic and international -- are kept very low.

Will the new 1993-94 WPI series help give us a better picture?
Given that the old series had the base year as 1981-82, the new series with 1993-94 as the base year is certainly much better. However, WPI itself is a limitation. We need to have a faster frequency of CPI estimates.

Is it OK to have a rural and urban WPI to get a more realistic picture ?
There are various applications of a measure of inflation. In a world where detailed information should be available easily and quickly, it is best to provide a wide variety of measures of inflation. Rural and urban inflation in consumer prices is one such variation. And one would welcome this addition to the measures already available.