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Fighting inflation Fighting deflation
Bonds
- Essential commodities act, Stock
limits, minimum export price, FCI’s
Open Market Sale Scheme,
Operation Greens for TOP, Price
stabilisation fund, Offering higher
MSP to farmers to increase
cultivation of a particular crop etc.
MCQ. Which of the following measures should be taken when an economy is
going through in inflationary pressures? [UPSC-CDS-2012-I]
1. The direct taxes should be increased.
2. The interest rate should be reduced.
3. The public spending should be increased.
Answer Codes: (a) Only 1 (b) Only 2 (c) 2 and 3 (d) 1 and 2
48.6 PILLAR#4: INDICES: CPI, WPI, IIP & OTHERS
Laspeyre German economist Etienne Laspeyres formula is used in calculation of WPI,
CPI and IIP index. It is a weighted arithmetic mean (average) of a basket of
commodities that tracks price / production level against the base year.
Formula NOTIMP.
Paasche German economist Hermann Paasche’s index tells us what today’s “Basket”
Index of commodities, would have cost @base year’s price.
Fisher American Economist Irving Fisher’s index is the Geometric mean of
Index (Laspeyrese and Passche), to give a more accurate picture.
48.7 INDEX → INFLATION INDICES
Inflation Index By Base year
Consumer Price Index: 1) Rural 2) Urban 3) All ______ 2012
India. उपभो ता मू य सूचकांक
Consumer Food Price Index (CFPI) 2012
उपभो ता खा य मू य सूचकांक
CPI Industrial Workers (IW) 2001
Labour Ministry’s
CPI Rural labourers (RL),Agri. labourers (AL) Labour Bureau 1986
Wholesale Price Index (WPI) Economic Advisor to 2011
थोक मू य सच
ू कांक DPIIT, Commerce Min.
MCQ. Which of the following brings out the 'Consumer Price Index Number for
Industrial Workers?(Asked in UPSC-Pre-2015)
(a) The Reserve Bank of India (b) The Department of Economic Affairs
(c) The Labour Bureau (d) The Department of Personnel and Training
Mrunal’s Economy Pillar#4: Sectors of Economy → Page 332
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48.7.1 Index → Inflation → CPI (All India), CSO, Base: 2012
Monthly CPI Components in (All India) Index → (decreasing order) Wt.
____ 45.86
Services: (Transport & communication > Health > Education > Recreation) 20.62
____ 10.07
Fuel & Light 6.84
Clothing / footwear 6.53
Misc. Personal care (soap etc) 3.89
Household goods & Services 3.80
Pan Masala, Tobacco, Intoxicants 2.38
Total Weight 100
- For Individual CPI for Urban and Rural areas, these weights are assigned differently. E.g.
CPI rural has zero weight to housing & 54.18 weight to food and beverages.
- Headline CPI (सु ख ु ा फ त) = The inflation figure arrived based on all of the above
components of CPI (All India).
- Core CPI ( ख
ु ु ा फ त) = Headline CPI MINUS (inflation in food & energy)
- Trend? CPI was towards Inflationary path in UPA/Manmohan era, Deflationary path
during Modi era- mainly due to falling food prices. Food commands ~46% weight in CPI
calculation. (Ref: Agro Handout: Food Inflation)
- RBI Monetary policy rate cuts in 2019 to address the deflationary trend in CPI.
48.7.2 Index → Inflation → Wholesale Price Index, EA-DPIIT, Base: 2011
Monthly WPI Components in descending order→ Wt.
Manufactured products: Processed Food, Edible Oil, Paper Products, ~64%
Chemicals, Plastic, Cement, Metal Products, Transport Equipments etc.
Primary Articles: ~23%
A. (Unprocessed) food articles, eggs, meat-fishes, oil seeds etc. (~19%)
B. Crude Petroleum (~2%)
C. Minerals (~0.8%)
Fuel & Power: High Speed Diesel (HSD) > Petrol > LPG ~13%
Total 100%
WPI: monthly growth is zigzag although towards deflationary path nowadays. During initial
Modi raj it even went into negative zone for some months due to fall in global crude price
(although since Union/State Govts kept raising Excise/VAT so it was not felt in real life).
48.7.3 WPI calculation: reforms in 2017
- Base year changed from 2004 to 2011.
- Separately, we’ll publish WPI FOOD INDEX to measure collective inflation in
unprocessed and processed food.
- Introduced new items, removed the redundant items (e.g. VHS player).
- Following the international practices, we have decided to measure only ‘price’ of
products. (Not ‘Price + indirect TAX’).
- Technical Review Committee (TRC) under Secretary (IAS) of DPIIT. They’ll meet will
meet at least once a year to update the methodology, weightage, list of items in WPI.
Mrunal’s Economy Pillar#4: Sectors of Economy → Page 333
