Inflation is like taxation that pinches us as consumers. For the average rural and urban Indian, food accounted for 52.9 per cent and 42.6 per cent of the value of consumption, respectively, during 2011-12. Inflation in food items, therefore, affects a majority among Indians as it leaves the buyers with little cash.

Experts have argued that in states where the National Food Security legislation has been implemented and the public distribution system (PDS) is running well, the poor are insulated against inflation in cereals. One of the key factors behind the UPA-2's defeat in the 16th Lok Sabha election is that it could not manage inflation.

Measuring inflation is a technical subject since only one set of numbers is inadequate to capture it. There exists an entire range of price indices to capture various facets of inflation such as Wholesale Price Index (WPI), Consumer Price Index (CPI), GDP deflator, Producer Price Index (PPI), Cost of Living Index etc.

Wholesale Price Index (WPI)

In recent times, too much focus has been directed towards measuring inflation based on WPI. The month-on-month rate of inflation in September 2014 (over September last year) in terms of WPI of food articles is found to be 3.5 per cent whereas the same for food and beverages in terms of CPI (Rural+Urban combined) stood at 7.6 per cent, which is almost the double of former.

Last year when the UPA-2 was in power at the Centre, the monthly rate of inflation in September 2013 (over September 2012) in terms of WPI of food articles was a whopping 18.7 per cent (see Table 1).

It is worth noting that the monthly rate of overall inflation in terms of WPI during August and September this year stayed lower than the corresponding figures for food articles.

Rate of inflation in CPI (combined) for fruits was 17.5 per cent in October, down from 22.4 per cent in September. Pic: Shambhu Ghatak

Experts believe that the WPI (used in countries like India, Japan, Greece, Norway and Turkey) is closer to a PPI (used in most OECD countries), and it gives an idea of the price levels prevailing at the wholesale market, or say mandis. It reflects what the producers charge their immediate buyers instead of the prices that prevail at the end of the trading chain in the retail markets (for example, in local kirana stores). The WPI does not take into consideration the price of services, which accounts for nearly 55 to 60 per cent of GDP in India.

The new government has constituted a panel headed by Dr. B N Goldar from the Institute of Economic Growth (Delhi) in August for deliberating on the issue of constructing PPI and eventually migrating from WPI. This has been done in tandem with the recommendations of the last two Working Groups for revision of WPI series, previously under Dr. Abhijit Sen and then under Dr. Saumitra Chaudhuri – both former members of the Planning Commission.

Among other things, the new Working Group will work out the methodology of constructing PPI in the Indian context. Unlike WPI, PPI covers transaction in both goods and services. As per the OECD definition, PPI measures the ‘average movements of prices received by domestic producers for goods and services sold on the domestic or/and on the export markets between one time period and another.’

While WPI includes taxes, PPI measures purely inflation without tax component.

Retail Price Indices for various classes

It is the CPI that actually reflects the prices that the ordinary (end) consumers are charged over the counter.

Prof. CP Chandrasekhar in his article, What defines headline inflation? informs us that in most countries, headline inflation is based on the CPI, and not the WPI, as opposed to the practice followed in India for long. CPI, however, is used by the government to grant dearness allowance (DA) to its employees in India.

The CPI rates of inflation in September 2014 for various types of workers witnessed a steady fall compared to that in September 2013 (refer to Table 1).

The month-on-month rate of inflation based on all CPIs and WPI also fell between August 2014 and September 2014.

It is not surprising, therefore, that the BJP-led NDA Government has been credited by the media for controlling inflation, and thus benefiting the poorest sections of the society.

Table 1: Consumer Price Indices for various types of workers and Wholesale Price Index


CPI (Industrial Workers) (Base 2001=100)

CPI (Agricultural Labourers) (Base 1986-87=100)

CPI (Rural Labour) (Base 1986-87=100)

WPI in food articles (Base 2004-05=100)

WPI (Base 2004-05=100)

Sep 2013






Aug 2013






Sep 2014






Aug 2014






Month-on-month rate of inflation  Aug  2014(%)






Month-on-month rate of inflation Sep 2014(%)






Month-on-month rate of inflation Sep 2013(%)






Source: Labour Bureau, Government of India
Office of the Economic Adviser to the Government of India, Ministry of Commerce and Industry

There used to be mainly 4 kinds of consumer price indices in India: CPI (Industrial Workers), CPI (Agricultural Labourers), CPI (Rural Labourers) and (Urban Non-Manual Employees-UNME).

Prior to 2011, there was no CPI for the entire population because of various difficulties. In order to facilitate the calculation of headline inflation based on CPI, the Central Statistics Office (CSO) has been engaged in producing a new, national, monthly consumer price index since early 2011, with separate indices for rural and urban areas and covering a set of final consumption goods, weighted by their share in the consumption basket and with their prices collected from retail markets.

From February 2011 onward, the CPI (UNME) released by the CSO has been replaced by CPI (Urban), CPI (Rural) and CPI (Combined). 

The rate of inflation based on the all India general CPI (Combined) in September 2014 on a point to point basis (September 2014 over September 2013) is 6.5 per cent as compared to 7.7 per cent in the previous month of August 2014.

The corresponding inflation rates for rural and urban areas in September 2014 are 6.7 per cent and 6.3 per cent respectively (see Table 2).

Table 2: Retail price inflation based on the new Consumer Price Index (Base 2010=100)


CPI (Rural) (Base 2010=100)

CPI (Urban) (Base 2010=100)

CPI (Combined) (Base 2010=100)

Aug 2013




Sep 2013




Aug 2014




Sep 2014 (provisional)




Month-on-month rate of inflation September 2014 (%)




Source: Consumer Price Index Numbers on Base 2010=100 for Rural, Urban and Combined for the month of September, 2014
Consumer Price Index Numbers on Base 2010=100 for Rural, Urban and Combined for the month of October, 2013

The new data released by CSO on 12 November shows that the rate of inflation under CPI (Combined) almost halved in October 2014 (i.e. 5.5 per cent) vis-a-vis October last year (i.e. 10.2 per cent).

The monthly rate of inflation in the Consumer Food Price Index (CFPI) declined to 5.6 per cent in October as compared to 7.7 per cent in September.

GDP Deflator

The GDP deflator (also known as implicit price deflator for GDP) is one of the most comprehensive measures of inflation, implicitly computed from national accounts data as a ratio of GDP at current prices to constant prices.

The GDP deflator encompasses the entire spectrum of economic activities including services. In India, it is available on a quarterly basis at a lag of two months since 1996.

It must be noted that unlike the CPI, the GDP deflator is not based on a fixed basket of goods and services; the basket for the GDP deflator is allowed to change from year to year in sync with people's consumption and investment patterns.

The rate of inflation based on the GDP deflator, which was 5.6 per cent during the first quarter of 2013-14, increased to 5.9 per cent during the first quarter of 2014-15 (see Table 3).

Table 3: Price inflation based on GDP Deflator


2012-13 (Q1)

2013-14 (Q1)

2014-15 (Q1)

GDP at Factor Cost (current prices) in lakh crore (Rs.)




GDP at Factor Cost (constant 2004-05 prices) in lakh crore (Rs.)




GDP Deflator




Rate of Inflation based on GDP Deflator (over previous year)



Source: Press Note: Estimates of GDP for the First Quarter (April-June) of 2014-15

Therefore, we have a situation where all the measures of inflation exhibit better control on price rise under the new Government at the Centre, except the GDP deflator.

The Monetary Policy Report issued by the Reserve Bank of India in September 2014 indicates an increase in the rate of inflation based on GDP deflator between the first quarters of 2013-14 and 2014-15, vis-à-vis a fall in the rate of inflation based on various CPIs during the corresponding period.

According to data accessed from World Bank website, the annual rate of inflation in India based on the GDP deflator had declined over the years from 9.0 per cent in 2010 to 6.9 per cent in 2013. Therefore, one could perhaps say that the UPA-2 had a better command over inflation based on GDP deflator.   

What has restrained 'headline' inflation?

Explaining the low rate of inflation in CPI, the Monetary Policy Report issued by the Reserve Bank of India in September 2014 mentions that domestically input prices were stabilised due to dampening of international commodity prices of mainly crude oil, metals and chemicals.

Brent crude prices declined by 9.5 per cent between April and September to US$ 97.5 per barrel in September this year, despite interruptions in supply owing to geo-political conflicts, which include a political crisis in Libya, stress in relationship between Ukraine & Russia, and ISIS' effort to disrupt oil production in Iraq. Global supply of crude oil has remained high because of increased supplies from OPEC members and the 'shale boom' in the US.

Depressed demand due to persisting global recession coupled with higher supply of crude has kept the international oil prices low, writes Jayati Ghosh and CP Chandrasekhar in their article entitled Exploiting the Oil Price Crash.

Due to the easing of international crude prices and stability in exchange rates, inflation in transport and communication costs has experienced moderation since October 2013, mentions the RBI Monetary Policy Report.

The staggered increments in the administered prices of diesel along with weakening of international crude oil prices have eliminated the diesel under-recovery of oil marketing companies (OMCs) in September 2014. Contribution to headline inflation from fuel and lighting has also been falling as a result of inadequate administered price revisions, adds the report.

Since diesel prices have been deregulated in October, in case the international oil prices jump in the future, it will push up the cost of those operations where diesel is used, such as transportation, cautions Ghosh and Chandrasekhar. If India's gold imports continue to rise, it will neutralise the benefits of decline in international oil prices, thereby, affecting the balance of payments.

The RBI report on monetary policy also says that cost-push inflation on account of wages is under control, resulting in smaller increases in the minimum support prices than in the past. Costs of domestic farm inputs have decelerated in the last one year. Similarly, escalations in industrial raw material cost have been easing. Input costs in the services sector have moderated from their recent peak in 2011. Rentals have also eased in the recent months.

There has been a modest toning down in monthly rural wage growth since November 2013. However, costs of services such as doctors’ fees, private tuition fees, cycle rickshaw fares, barber charges, washing/ironing charges, tailoring charges and laundry charges have been found to rise in the recent months.

Adoption of tight monetary policy in the past has brought down inflation except in food and fuel, claims the RBI report.

Driven by the decrease in grain prices, global food prices fell to a seven-month low in August 2014. This, however, adversely impacts crop growers who export their agricultural produce. Cotton farmers in Gujarat and Maharashtra are already suffering due to falling international prices and the squeeze in import demand from China, as reported recently.

But despite the fall in global prices, food inflation overall has remained high in the Indian context. Although fruits and vegetables have a low share of 7 per cent in CPI, they contributed to about one-fifth of headline inflation in July and August, thanks to sharp spikes in prices. Protein-based items such as eggs, fish, meat, milk and pulses have contributed to about one-sixth of overall inflation through 2014-15 so far.  

Reforming the APMC Act

In his budget speech, Finance Minister Arun Jaitley had said that the Centre will work closely with the state governments to accelerate the setting up of a national market. The central government will help the states re-orient their respective Agricultural Produce Market Committee (APMC) Acts and to provide for establishment of private market yards/private markets.

The state governments will also be encouraged to develop Farmers’ Markets in town areas so as to enable the farmers to sell their produce directly to the consumers, which will eliminate middle-persons in the supply chain and dampen inflationary forces.

However, many experts as well as traders' and farmers' associations have contended that amending the APMC Act will lead to multinational companies and private corporations taking over the agricultural marketing system. As a result, farmers will lose control over their produce.

Another problem of privatised mandis (such as ITC's choupal) is that neither all varieties of the produce (in terms of quality) nor all type of crops will be bought by the agri-business corporations. Standardisation of the quality of produce traded in such private mandis may affect the sellers/farmers.

Apart from this, unlike the traditional mandis, privatised mandis and government procurement centres are not open throughout the year. Private hubs mainly benefit the medium and large farmers instead of the small and marginal farmers. Therefore, reforming the APMC Act will not automatically lead to benefitting all sections of the farming community and checking the retail prices. 

What lies ahead

Given the socio-political implications of inflation, market intelligence needs to be strengthened by the government for providing a better picture of the prices prevailing (presently as well as in future) at both wholesale and retail markets, spread across various centres and zones. Hoarding and black marketeering can then be dealt with in a heavy-handed manner. Reforming the APMC Acts at the state-level requires proper consultations with all stakeholders including the small and marginal farmers.

A cautious approach needs to be taken before opening up trade in agricultural commodities because of volatility in international prices, which can benefit or hurt farmers and their livelihood security depending upon the prevailing global situation.

Moving towards alternative sources of energy can reduce India's dependence on petroleum and can also tame inflation in the long run. Talks at the WTO level for transfer of green technologies (say, via compulsory licensing) should be held with the developed countries in this regard. International diplomacy for energy sufficiency will depend on the pragmatic external policies of the Government, which has implications for the domestic economy.

Sufficient investment in infrastructure such as roads, storage facilities/warehousing and irrigation too can help in keeping inflation under check. Climate smart agriculture is presently seen as a solution to future rises in temperature due to global warming, which can trouble agricultural production and yields.

The RBI Monetary Policy Report cautions us that there are chances of inflation in the future owing to "the skewed spatial and temporal distribution of the monsoon and from geo-political tensions." Experts say that the fall in the rate of inflation in CPI, which is happening due to the strong base effect presently, is likely to taper off by early next year. Hence, it is time to keep our fingers crossed rather than jumping the gun and celebrating the fact that inflationary forces are fully under control.           


GDP deflator and rate of inflation across countries, World Bank
Monetary Policy Statement for 2014-15, RBI Bulletin, 10 October 2014
Consumer Price Index Numbers on Base 2010 for Rural, Urban and Combined for the month of October, 2014
Key Indicators of Household Consumer Expenditure in India: 68th round NSS (2011-12)
Office Order: Constitution of Working Group on Producer Price Index
Union Budget Speech 2014-15 delivered by Arun Jaitley, 10 July, 2014
New CPI to Be Released From 18th of February
Understanding Mandis - Market Towns and the Dynamics of India's Urban and Rural Transformations
Mandis: Agricultural Markets and Market Towns in India
Producer Price Indices - FAQs