Question 5 from UPSC CSE 2020 - ECONOMICS

Question

Consider the following statements:
1. The weightage of food in the Consumer Price Index (CPI) is higher than that in the Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. The Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?

Accepted Answer

Correct Option: A. 1 and 2 only

Strategy: - Recognize that food weight is higher in CPI than WPI, as CPI tracks average consumer spending patterns.
- Observe that WPI does not include services, while CPI does.
- Invalidate statements claiming WPI as RBI's monetary policy anchor; RBI now uses CPI based on Urjit Patel committee recommendations.

Key Info: ## Inflation Indices in India: CPI vs. WPI

Consumer Price Index (CPI) and Wholesale Price Index (WPI) are the primary indices used to measure inflation in India.

### Consumer Price Index (CPI)
- Measures the average change in prices paid by consumers for goods and services at the retail level.
- **Food Weightage:** Substantial, approximately 45-50% of the basket.
- **Includes Services:** Yes, covers healthcare, education, transportation, and housing.
- **Types:** Various forms including CPI-Combined, CPI-Urban, and CPI-Rural.

### Wholesale Price Index (WPI)
- Measures the average change in wholesale prices of goods traded in bulk across the country.
- **Major Components:** Manufactured goods, primary articles, and fuel.
- **Food Weightage:** Much lower, about 24%.
- **Includes Services:** No, covers only goods (approx. 697 commodities as of 2011-12 base year).
- **Manufactured Products:** Over 60% weightage.

### RBI and Inflation Targeting
- **Anchor Index:** Since 2016, based on Urjit Patel Committee recommendations, the Reserve Bank of India (RBI) officially adopted CPI (Combined) as its nominal anchor for inflation targeting.
- **Previous Anchor:** WPI was tracked previously.
- **Rationale:** Transition to CPI better reflects the cost-of-living impact, aligns with international best practices, and measures inflation as felt by the general public.
- **WPI's Role:** Remains an important macroeconomic indicator but is no longer the primary policy anchor for RBI decisions.

### Services and Economic Impact
- **Services Inclusion:** Only CPI reflects changes in prices of services, which are a significant portion of household expenditure.
- **CPI Linkages:** Dearness Allowance for government employees and various economic policy analyses are commonly linked to CPI for accuracy on real household impact.
- **WPI's Ongoing Use:** Continues to be used for tracking price levels at the producer or wholesale level.

Answer

Option B: 2 only

Answer

Option C: 3 only

Answer

Option D: 1, 2, and 3