Today inflation is at its lowest ever level in India in the past two decades. It has been stagnant ever since the Budget announcement. Only after the hike in diesel, kerosene and LPG came into effect that it suddenly spiralled to cross over give per cent in less than two weeks of remaining static at two per cent for over four weeks.Today, India has a bumper food crop of over five million and has had two consecutive successful monsoons which has helped in the agriculture sector performing well. Thus, with both the kharif and rabi seasons being successful it is low food prices due to an abundant food crop that saw inflation reach its lowest level in the past eight years. It was so low that many economists were of the view that it would even become negative. But recent budget announcements of a hike in the fuel prices and PDS becoming costly saw a sudden spurt in inflation. In India confusion still prevails over the right type of index that should be used so as to calculate the real price level prevailing inthe economy.

India has a vast population with vast sub-division of labourers and and consumers who have different food habits and living standards. In such a situation what is then the correct index of WPI or CPI? Well, WPI is more of a national index whereas CPI is more at a retail level covering more rural poor masses. It provides a more wholistic and realistic picture. But, its access is limited as collection of data becomes slightly difficult. It is in India that we depend on various factors to calculate the inflationary impact. WPI,CPI and the GDP deflator have all been used to calculate the price levels which depend on several factors uncommon to all which can give confusing indications of the actual price level prevailing. WPI which is commonly used is not a very realistic indicator as it only captures the price level at the national level excluding many commodities in the basket which are commonly consumed. What is really required if India has to judge its standard of living is to have a indicatorat the retail level. In India a vast section of the whole population lives in rural areas. This section of the population has a complete different lifestyle and their consumption basket is also very different from that of the urban consumers. It is in the urban centres that importance is given to services and housing but its importance is far less in rural areas where access is denied. Therefore, many economists have suggested that there should be a separate consumer price index directed specifically at the urban and rural population which can capture price at the retail level in a more systematic manner. So if a dual index is formulated you can get a better picture of the two sections of society thus gauging which commodities are fuelling inflation at both the rural and urban level.

As these indices will cover a vast section of society, they will be more realistic and have wider coverage of the sub groups of labourers and consumers at the state level. Initially, a sample survey can be conducted to see if data availability is not a problem and then a finalised index can be formulated. In India, unlike the developed markets are not integrated and price variations are plentiful across cities. Lack of infrastructure and transport facilities distorts movement of products which can cause artificial inflation which can be of a temporary nature.

Today the issue is not of formulating a right index but of alleviating poverty and unemployment. A right index could pep up demand as monetary resources will increase in the economy which in turn will spur growth and competition. The government will have to take a proactive stance so as to curtail the fiscal deficit alongwith improving productivity levels to keep expenditure down. Today prices appear to be low because they were compared to a high base last year which is a statistical fallacy. So, a beginning has been made with the revision of the base to 1993-94 which will help give a more clearer picture.

It will take a while to make the new index operative after experimenting on it for some time. But what the government should stress on is to see that there are no wide fluctuations in the price levels as these cause widespread distortions.

Like most other indicators, inflation only reflects the urban living standards and ignores the rural poor for whom it is most essential to have a appropriate price level indicator.