How is WPI inflation rate calculated in India?

With inflation rate surging to new heights, the term is more in the news than ever in India. While leaving aside the debate on whether India should adopt CPI (Consumer Price Index) based inflation calculation rather than the current WPI (Wholesale Price Index) based one, let’s find in detail how inflation rate is calculated in India; which is the WPI based inflation rate.

What is inflation?
Inflation rate of a country is the rate at which prices of goods and services increase in its economy. It is an indication of the rise in the general level of prices over time. Since it’s practically impossible to find out the average change in prices of all the goods and services traded in an economy (which would give comprehensive inflation rate) due to the sheer number of goods and services present, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate.

Mathematically, inflation or inflation rate is calculated as the percentage rate of change of a certain price index. The price indices widely used for this are Consumer Price Index (adopted by countries such as USA, UK, Japan and China) and Wholesale Price Index (adopted by countries such as India). Thus inflation rate, generally, is derived from CPI or WPI. Both methods have advantages and disadvantages. Since India uses WPI method for inflation calculation, let’s go in to the details of WPI based inflation calculation.

How is WPI (Wholesale Price Index) calculated?
In this method, a set of 435 commodities and their price changes are used for the calculation. The selected commodities are supposed to represent various strata of the economy and are supposed to give a comprehensive WPI value for the economy.

WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the calculation, let’s assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered.

Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

The WPI of wheat for the year 1980 is,
(Price of Wheat in 1980 – Price of Wheat in 1970)/ Price of Wheat in 1970 x 100

i.e. (6.10 – 5.75)/5.75 x 100 = 6.09

Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09.

In this way individual WPI values for the remaining 434 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weight-age depending upon its influence in the economy.

How is inflation rate calculated?
If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate for the year will be,

(WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100

For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation rate for the year 1981 is,

(109.72 – 106.09)/106.09 x 100 = 3.42% and we say the inflation rate for the year 1981 is 3.42%.

Since WPI figures are available every week, inflation for a particular week (which usually means inflation for a period of one year ended on the given week) is calculated based on the above method using WPI of the given week and WPI of the week one year before. This is how we get weekly inflation rates in India.

Characteristics of WPI
Following are the few characteristics of Wholesale Price Index

WPI uses a sample set of 435 commodities for inflation calculation

The price from wholesale market is taken for the calculation

WPI is available for every week

It has a time lag of two weeks, which means WPI of the week two weeks back will be available now

There are certain arguments in the open saying that the government shall adopt Consumer Price Index (CPI) method for inflation calculation, which gives a more correct picture. More of that in another post...

Related Articles
- Commodities and their weight-ages in WPI calculation of India
- Inflation rates of India (2009)
- Inflation rates of India (2008)
- Base year and number of commodities used for inflation calculation in India
- The magic of Inflation

Is India growing; really?

Recently I read this article by Pankaj Mishra in The New York Times. Though written way back in 2006, with its inferences, the article leaves behind a lot of questions for the reader regarding where exactly the Indian economy stands; questions those are relevant even today.

Quoting from the article,
Recent accounts of the alleged rise of India barely mention the fact that the country's $728 per capita gross domestic product is just slightly higher than that of sub-Saharan Africa and that, as the 2005 United Nations Human Development Report puts it, even if it sustains its current high growth rates, India will not catch up with high-income countries until 2106.

Nor is India rising very fast on the report's Human Development index, where it ranks 127, just two rungs above Myanmar and more than 70 below Cuba and Mexico. Despite a recent reduction in poverty levels, nearly 380 million Indians still live on less than a dollar a day.

Malnutrition affects half of all children in India, and there is little sign that they are being helped by the country's market reforms, which have focused on creating private wealth rather than expanding access to health care and education. Despite the country's growing economy, 2.5 million Indian children die annually, accounting for one out of every five child deaths worldwide; and facilities for primary education have collapsed in large parts of the country (the official literacy rate of 61 percent includes many who can barely write their names). In the countryside, where 70 percent of India's population lives, the government has reported that about 100,000 farmers committed suicide between 1993 and 2003. [Courtesy: Pankaj Mishra, The New York Times]

I wish the economic growth of India not just confines to a small section of the society or creating private wealth but shall also comprise of the lower strata to ensure a ‘complete growth’. But above all, I wish the India growth story doesn’t blindfold the real situation of India, succinctly put across by the article. Do read it!

Top 10 companies of India

Rediff.com has compiled a list of the top 10 companies of India, based on FY 2007 sales revenues. Not surprisingly, the list is dominated by oil companies.

According to them, the top 10 companies are,

1. Indian Oil Corporation – Rs 201,493.85 Crore*
2. Reliance Industries^ – Rs 111,264.23 Crore
3. Bharat Petroleum Corporation – Rs 97,189.37 Crore
4. Hindustan Petroleum Corporation – Rs 93,912.34 Crore
5. Oil and Natural Gas Corporation – Rs 75,529.12 Crore
6. Steel Authority of India Limited – Rs 34,390.93 Crore
7. National Thermal Power Corporation – Rs 33,875.70 Crore
8. Tata Motors – Rs 31,999.47 Crore
9. Tata Steel – Rs 25,117.78 Crore
10. Sterilite Industries – Rs 24,376.83 Crore

*1 Crore is equal to 10 million
^Reliance Industries doesn’t include all the reliance group of companies

Term insurance to become cheaper

Wait for some time, if you have decided to buy a term insurance. The Insurance Regulatory and Development Authority (IRDA) is looking at ways to promote term insurance as they feel the general attitude among the public to deem insurance as a savings opportunity should change.

In India, life insurance is generally seen as an investment option rather than a cover for life. As a result we have insurance products like endowment policies, money back policies, ULIP etc from various insurance companies. Previously, I had talked about how inefficient an endowment policy is, where one pays huge premiums for small sum-assured to get a return that’s way less compared to what he/she would get from other investments made for the same period.

The main reason for the inclination towards savings oriented insurance policies was the lack of other investment options till a few decades back and to a lesser extent, the lack of awareness people had on the alternatives. But now we have quite a few efficient investment opportunities such as mutual funds, realty, commodities, equities etc. that can give a person much higher returns. And hence the affinity towards endowment and money back policies, ULIPs etc. shall come to an end; which triggered the IRDA move.

IRDA has identified two ways to popularize term insurance, one by incentivizing the insurance company and two, by incentivizing the insurance agent (Agents usually push ULIPs and endowment plans as they provide higher commissions). IRDA would reduce the solvency margin for the insurance company so that the reserves need to be maintained by the insurance company would come down. Thus, the amount to be allocated by the insurance company for writing a term insurance would reduce by 60%, making it cheaper than before.

Seven things you should know about LTA (Leave Travel Allowance)

LTA can be availed twice in a block of 4 years. The block is defined by the government. The current block is 2006 – 2009 and is based on calendar year

Only the travel costs (air, rail or public transport, dependent on the employer) can be exempted under LTA

If LTA is not claimed in a particular block of 4 years, ‘one’ can be claimed in the ‘first year’ of the next block of 4 years

LTA is valid only for travel within India

Two LTA claims cant be made in the same year for travels made in the same year

If your spouse also has LTA, then both of you can claim two LTAs each in a block of 4 years. So that each year you can have one LTA claim

LTA can be claimed for travel done by self, spouse, children, parents and siblings dependent on self. Only thing is self (person who is claiming LTA) has to be present in the travel

RBI recommends free ATM usage

Most of the banks charge a considerable amount to its customers when they use ATM facilities of a different bank to do transactions on their accounts. I myself have paid amounts to the tune of Rs. 61.80 (Usage Fee: Rs. 55.00, Service Tax: Rs. 6.60, Education Cess: Rs. 0.20) for such usages I have made. Part of this usage fee is paid to the bank whose ATM is been used. Considering the costs involved, I always felt that this is an obscene amount.

The irony is even if one withdraws Rs. 100, he has to pay Rs. 61.80 as usage charge. I wonder why the banks are not charging the usage charge as a percentage of the money being withdrawn, while they charge based on percentage for various other services. For example, processing fee for a service such as Balance Transfer on credit card is a percentage of the amount being transferred. The bank would say that despite the quantity of money being withdrawn from an ATM, the service is used anyway, which involves the same set of procedures and that’s why it’s a fixed charge. But here, my question is, how is it different for the processing fee on balance transfer? Isn’t the service being used and the efforts involved are same for various balance transfer amounts? But then one doesn't need to think too much to understand why the banks charge in percentage for services involving higher amounts!

Thus, reading the minds of millions of bank users of India, the RBI has directed the banks to allow free access to ATMs by April 2009. By March 2008 banks that are charging more than Rs. 20 for using a different banks' ATM will have to bring down the charge to Rs. 20. Also, balance enquiry has to be made available free of cost across all ATMs. In order to bring in transparency to the banking system, RBI has also urged the banks to inform their customers before hand, the amount they shall pay for withdrawing money from a different bank's ATM, which would discourage the customers from using a different bank's ATM.

The RBI has also pointed out that in other countries such as UK, Germany and France, customers can access all ATMs in the country, other than the ones managed by non-banks, free of charge. With this move, the Indian banking system is set for a revolution and importantly more customer focussed, it seems.

New Tax Slabs

In the union budget for financial year 2008-09, the Finance Minister has announced the new tax slabs.

General
Till 1,50,000 – 0%
1,50,000 – 3,00,000 – 10%
3,00,000 – 5,00,000 – 20%
Above 5,00,000 – 30%

Women
Till 1,80,000 – 0%
1,80,000 – 3,00,000 – 10%
Remaining tax rates are same as general

Senior Citizen
Till 2,25,000 – 0%
2,25,000 – 3,00,000 – 10%
Remaining tax rates are same as general

This would be a welcome relief to crores of tax payers in the country who are caught under inflation woes.