The new series is built on a wider base of commodities (676) with larger number of price quotations for each of the items (5482), particularly in the manufacturing segment, to “not only better reflect the structural shifts but also to make WPI more broad based”, according to official sources. The weightage for the three principal groups - Primary Articles, Fuel & Power, and Manufactured Products - has been re-arranged, with a significant reduction under Primary Articles by two percentage points and an increase under Manufactured Products.

The weights have been assigned on the basis of wholesale transactions in the economy, taken at the first point of bulk sales in domestic market. How effectively the new WPI Index captures prices and can become a “more reliable indicator” of inflation - given its key role in macro-economic stability and as critical input in policy formulations - only time will tell.

Significantly higher weights have been given for Basic metals and metal products like steel, Machinery and Transport equipment. These together with Chemicals and related products make up more than 50 per cent of the total weightage for Manufactured Products (64.97). Textiles and Food products have their weights reduced. Under Primary Articles with reduced weightage (20.11, except for minerals which now include 'crude petroleum', lower weights are assigned for cereals, textiles, wood and leather products. In the Fuel & Power group (14.91), there is a 2.5 percentage point rise for mineral oils and almost an equal decrease in the weight for electricity.

Broadly, as of August 2010, both series are identical for the all-commodity index. But in Primary Articles, the monthly rates of inflation under the new series are significantly higher than the old numbers from August 2009 onwards. Food price inflation was over 14 per cent in August, under the new index. Higher rates of double-digit inflation are in the new series also when Manufactured Products and Primary Articles are taken together as a composite reference point for inflation.

Meanwhile, Finance Minister Mr Pranab Mukherjee is happy that the index has declined by more than one percentage point in August (8.5) from 9.8 per cent in July, also signaling perhaps that the headline double-digit inflation has been overcome. But, he notes, there is no room for complacency as some major commodity groups - primary products, especially food articles - and fuel group were still in double digit in August. Both RBI and Government have projected year-end (March 2011) WPI at between 5.5 to 6 per cent.

Inflation in India over the last two years has been driven primarily by cereal and other food product prices in double digit, requiring actions on both supply and demand sides, and where Government quietly watched the situation unfold, it became imperative for the monetary authority to address inflationary pressures and expectations in a growing economy. It was this singular concern that set the stage for RBI to begin a calibrated withdrawal, from January 2010, of its highly accommodative policy stance since October 2008.

For the Government, having made the easier options like duty reductions on imports (sugar) and export restrictions (foodgrains) at an early stage of prices beginning to harden, there was little appetite for any regulatory moves subsequently, even as prices of food and other essential items soared into double-digits, on top of double digits of the previous year. Given the economy's supply constraints on one side and demand pressures on the other, the market forces had a free run to dictate prices, both of food and non-food products.

That hundreds of millions in the country were forced to bear hardship, with little hope on the horizon, seemed to be of little consequence for Government though it let out expressions of concern now and then. The best minds of Government had to seek comfort setting deadlines for double-digit inflation to go down, due to 'base effect'' and/or as a result of assumptions about normal monsoon and new crop coming into the market. All these fond hopes were belied.

Organised sectors of the economy like business or services have to worry less because of cost of living compensation while Government doles out DA instalments regularly for its employees, to be free from discontent within the Establishment. Parliamentarians have helped themselves substantially, given the generosity extended to bureaucrats under the sixth pay commission. And for the poor, Government considers its job is done with the sale of foodgrains at highly subsidized prices through the public distribution system, which is fed from buffer stocks built up providing incentive prices to farmers.

In its first mid-quarterly review on September 16, taking into account the new index, RBI said that inflation continued to remain the dominant concern in macroeconomic management. The new WPI has better coverage of items, giving a slightly higher weight for manufactured products, it said. Both the old and the new series indicated a similar broad trend of inflation. For instance, the average monthly WPI inflation for Q1 of 2010-11, is in double digit under both series which indicate identical moderation in July.

According to RBI, the direction of inflation rate movement is ”consistent” with its projection in its July review of 6 per cent end-March 2011. In its assessment, inflation appears to have stopped accelerating though the rate may remain at ”unacceptably high” levels for some months. RBI, which acted swiftly when inflation started getting generalised, said that early signs of a downturn in non-food inflation now could suggest that monetary actions are having an impact on both inflationary expectations and demand “in a non-disruptive way”. But with headline inflation still above past trends (5 to 6 per cent), the situation calls for “continued policy response to keep inflationary expectations anchored”, even though the role of 'normalisation' may have become less important.

On inflation, Mr Mukherjee had taken the line that RBI would take “appropriate action”, given his over-riding concern for growth at not less than 8.5 per cent this year and the target he has set for 9 per cent in 2011-12. Unusually, appreciation has been voiced by the Finance Minister for the first mid-quarterly review of RBI. Observers would see it as significant in the context of ongoing tussle over the degree of autonomy of central bank vis-à-vis the Finance Ministry. But the review itself sounds strong on growth prospects, both in agriculture and services, and has music for Mr Mukherjee's ears when it says the risk of budget deficit over-shooting the budgeted 5.5 per cent is “virtually eliminated”. (IPA Service)