* RBI Governor says CPI will need improvement
* Gov says will discuss panel's CPI suggestion with govt
* CPI inflation is too high, gov says
By Manoj Kumar
NEW DELHI, Jan 28 Global investors may well be
putting their faith in postmen like Phanin Deka when they decide
to buy or sell Indian assets in the future.
He is one of about a thousand post workers collecting data
that determines the level of India's consumer price index, which
is likely to become the central bank's most important tool for
setting monetary policy.
Deka, a postmaster in Sarpara in the northeastern Indian
state of Assam, spends 6 days every month visiting two villages
by bicycle to collect prices from 15 shops.
"At times, some shopkeepers refuse to co-operate. I think
they consider me as an irritant, particularly when customers are
around," said Deka.
Last week, a committee formed by Reserve Bank of India (RBI)
Governor Raghuram Rajan proposed making CPI the central bank's
main inflation measure and using it to set an inflation target,
part of sweeping proposals to revamp monetary policy in a
country that has long struggled with high inflation.
It would make CPI the most important data followed by the
central bank and key in determining changes in interest rates
that could affect millions of dollars in investments and loans.
For years, India has been an outlier among major economies
by relying as its main inflation gauge on changes in wholesale
prices, collected from India's cities. That was because the CPI
was seen as too heavily geared to food prices, which are
unresponsive to the ups and downs of interest rates because
people have to eat.
On Tuesday, the RBI unexpectedly raised its policy interest
rate by 25 basis points to 8 percent, citing its intent to bring
consumer inflation down in line with the path spelled out by the
panel, an indication it will adopt those recommendations.
Rajan said the RBI would discuss the panel report with the
government before proceeding on its proposals, but said retail
investors and consumers look at CPI inflation for guidance.
"Over time we have to figure out how we make the index
better," Rajan said.
"But the fact that the index is not perfect does not say
that there is no problem. CPI inflation is too high."
There is a wide gap between wholesale and consumer inflation
in India, so if the new set up is approved, economists expect
higher interest rates for longer. In December, WPI inflation in
Asia's third-largest economy was 6.16 percent and CPI was nearly
Using CPI as a benchmark eventually to bring inflation down
to a targeted 4 percent, plus or minus 2 percent, would better
reflect the way inflation affects the broader population, the
However, the current CPI inflation series was launched only
in 2012 and is based on nearly decade-old consumption patterns
in a country of 1.25 billion people whose spending habits are
changing fast. Average incomes have more than doubled over the
It still measures changes in the cost of cassette tapes,
while smartphones - fast becoming ubiquitous in India - are not
Power failures, worker strikes that shut shops and
businesses, heavy rains and flooding, and even insurgencies all
make the postal workers' data collection more difficult.
That leads to some guess work.
"Sometimes during the rainy season, I am unable to go out.
Then I have no option but to fill in the prices of different
items myself," said a postman in Guwahati in northeastern India,
who declined to be identified.
"Usually I go to shops once or twice in two or three months
to check price trends and fill in the price details myself by
cross-checking with my wife," he said.
Arvind Mayaram, economic affairs secretary at the ministry
of finance, acknowledged there are shortfalls in the consumer
"CPI has a lot of imperfections," he told a TV channel last
week. "We know that it requires a whole lot of sophistication,
which we haven't achieved yet on determining CPI."
HOUSES AND MILK
Consumption patterns between rural and urban India differ
dramatically, and there is no data available on rural housing
Food consumption, the key driver of persistent consumer
price inflation, is changing as incomes grow, especially in
rural areas. Indians now eat more protein, fresh fruits and
vegetables, whereas in the past their diet was more based on
cereals, rice and vegetables.
Statistics Ministry officials say the data is fairly robust
and comparable to international standards, but needs to be
updated to reflect changing consumption habits.
Food is now about 50 percent of the index, the highest among
the BRICS nations of Brazil, Russia, India, China and South
Africa. That weighting will be brought down in a new CPI series,
said T.C.A. Anant, India's chief statistician. Clothing, now
just under 5 percent of the basket, would also change, he said.
"There has been a decline in the share of food in the total
expenditure, and within food there is shift from cereals to
protein, eggs, milk and other items that need to be reflected in
the index," he told Reuters.
Food is a major source of inflation - about a third of fresh
produce perishes before it reaches the shops - and is currently
running at double digits.
India's postal service started in 2011 to collect price data
for the Statistics Department.
Collecting quality information on roughly 300 index items is
a challenge in such a large country, and some officials
privately expressed doubt over the quality of price data
collected by the postmen in village markets.
"A postman who cannot even timely deliver letters, you
expect him to gather price data on hundreds of items?" said a
senior official at the statistics department. "You can imagine
what happens when a truck driver drives a Mercedes-Benz car."
Large swathes of rural northeastern and central India are
essentially controlled by militants in long-running ethnic and
Naxalite insurgencies, one of the more extreme factors making it
difficult to gather data.
"Half of the month here businesses remain shut due to
strikes called by various organisations or there are other
problems related to militancy," said another postman, who also
declined to be identified.
Pronab Sen, head of the National Statistical Commission and
Anant's predecessor as India's chief statistician, said that
until the CPI index builds long-term data, the central bank
should use both the CPI and WPI to set monetary policy.
"If two indices are telling me two different stories, and I
ignore one, then what I am doing is essentially, deliberately
losing information, and any loss of information leads to lower
quality of decision," said Sen.