Last month the government revised the wholesale price index (WPI), making it more broad-based and representative of inflation in the present context. The new index will cover 676 items compared to 435 earlier. The number of price quotations that will be used for producing the index has been increased from 2,000 to 5,500. The base year has also been changed from 1993-94 to 2004-05. The immediate impact of this revision was a drop in the August inflation figure from 9.5 per cent (according to the old index) to 8.5 per cent.

Change in product basket

The new index will now measure price changes in 241 more items than the earlier index, which measured price changes in 435 items. Of the 435 items, the government has retained only 259 and added 417 new items (62 per cent) to the new index.

The index comprises three product categories - primary articles, fuel and manufactured products. The manufactured products category has seen the maximum revamp with 169 items from the earlier basket being dropped and 406 new ones being added. While the fuel basket remains unchanged, the primary articles category has seen seven items being dropped and 11 new ones being added.

Items such as ready-made food, computer stationery, dish antennas, ice cream, condensed milk, soft drinks and VCDs have been added, while some items such as TV sets (B&W), scooters, plastic items, printing items and fireworks have been dropped or revised. "Seasonal items now do not show up in the WPI once they disappear from the market, and their weights are redistributed across the WPI. Thus, these factors may exacerbate seasonality in the new series," says Tushar Poddar, economist at Goldman Sachs. According to Jay Shankar, chief economist and vice-president, Religare Capital Markets, the new index is more in line with people's current consumption patterns. "Many items such as alarm clocks that were used in the early nineties are no longer used today. Similarly many new items such as mobile phones that are used today were not in existence earlier. Therefore, to make the index more relevant to today's context, there was a need to overhaul it," he says.

Weightage revised

In the new index, the weightage of manufactured products is 65 per cent (up from 63.8 per cent in the earlier index), of primary articles is 20.1 per cent (down from 22 per cent) and that of fuels is 14.9 per cent (up from 14.2 per cent). The drop in August inflation figure can be attributed to the drop in weightage of food articles in the revised index. In the new index, food articles have been assigned a weightage of 14.3 per cent, down from 15.4 per cent earlier.

The number of price quotations to be used has been increased from 1,981 to 5,482. Says Jay Shankar: "The more quotations you have, the better and more accurate the inflation numbers become."

In India, WPI is the most closely tracked inflation index. Being most commonly quoted in the media, it influences both public perception of how high inflation is and policymakers' decision making (particularly monetary policy). As the decades go by, people's consumption patterns change. The WPI then must undergo periodic makeovers to make it more representative and contemporary. This is what the new index should hopefully achieve.