Annual rates of changes in WPI (also interpreted as annual inflation rates) have been calculated both for the revised series and the existing series. These are placed alongside the indices in Table-8.1. Several interesting observations could be made in comparing the annual rates of change (ARC) using the old basket of commodities (1981-82 base) and the reconstituted basket (1993-94 base). Some interesting medium term and secular trends also appear to stand out.

8.2 The Working Group has adopted the practice of using the average of monthly indices for the year 1993-94 (i.e., annual average) with 1981-82 base to estimate the linking factors of the old series for comparison with the new series. It is also noted that instead of using a single linking factor, the Working Group has used linking factors for "All Commodities", the three major groups and the groups within them, separately. Each group contains its own basket and it is useful to note the change at that level, in addition to its major group level and all commodities in the economy.

8.3 Comparing the new series with the old series at the "All Commodities" level, what stands out as the most notable point is that the new series of indices start at a higher level than the old series, accounting for a relatively higher annual rate of change (ARC) in 1994-95. Thereafter the two series move in consonance with each other. In fact the ARC in the new series are a little lower than those in the old series from 1995-96 onwards. More or less the same pattern of the level of indices and the annual movements is noticed in most of the major commodity groups also. The only exceptions are the ‘paper and paper products’, ‘rubber and plastic products’, ‘non-metallic minerals’ and ‘basic metals alloys etc.’, where the peak occurs in the year 1995-96, and thereafter the new series moves at a lower pace than the old series.

8.4 The nature of the index we are dealing with, i.e., Laspeyre’s fixed base year weights index, and the general economic behaviour of the production and trade system would normally lead us to expect that the ‘new series’ should generally give a lower rate of change (or a lower rate of inflation, as it is generally interpreted) than that the older series produces. Over time , the commodities which gain in weight would also be the commodities whose relative prices would also fall because of increasing volume of production and trade. In the new series, such commodities would have larger weight than in the older series. Electronic goods and computers are an outstanding example of this trend. In our computed new series we find that the expected trend is seen after one year in most cases (and after two years in some cases). As to why the ‘trend is not observed’ from the very beginning of the new series needs a little explaining. It may be mentioned here that exactly the same pattern of movements of indices was observed even last time when the base of WPI was changed to 1981-82.

8.5 The reason for this appears to be the fact that commodities, though retaining their apparent identity from use point of view, change substantially in quality over time. The new set of commodities which represent a particular group in the index, are much better in quality (and therefore more in quantity, if quality could be translated into quantity). The new set of commodities therefore has higher prices. Say, for example, new models of cars, have higher prices than the older cars because of their quality and versatility. And hence, for motor cars as a group in the new series, one starts off with a higher level of price index. However, as the car production increases competition grows, not only that the prices will not rise at a fast rate, but might even decline in relative terms.

8.6 Thus, the one time increase in the level of new index is due to commodity composition representing in general higher quality (and hence higher quantity). Thereafter the new series moves at a slightly lower pace.

8.7 Comparing the indices at the group level over the time span of 1993-94 to 1998-99 on an annual average basis, dispersions in price movements are seen more clearly. Within the major group "Primary articles", the group "Food articles" have increased the most from 100 to 159.25, higher than the groups "Non-food" (up at 151.71) and "Minerals" (111.77). Within the major group "Manufactured products", the group "Textiles" have risen the least (up at 114.27), followed by the groups "Rubber and plastic products"(125.63), "Machinery and machine tools" (125.87), "Non-metallic mineral products" (128.90) and "Transport equipment and parts"(136.57).

8.8 When the indices are processed to arrive at ARCs for the new and old series with monthly data (and weekly too, but not covered in the Report), that the importance of restructuring the weighting diagram becomes abundantly clear. As would be the case, the real picture would stand out as the indices are compared at more specific levels of major groups and groups of commodities.

8.9 Monthly figures for "All commodities" (Table 8.2) reflect clear phases in price movements in various underlying major groups, some of which moderate each other out at the overall level. The period begins (1994-95) at the economy level with a high inflation in the first three quarters creeping upto very high levels of more than 17% in the last quarter. By contrast, this phase is not so well captured in the frame of the old series, which has tended to depress inflation rate numbers from their actual levels uniformly. The year 1995-96 begins and remains high for the first half, drops to moderate levels in the second half and remains moderate for the entire period till the end of 1998-99, with the first quarter of 1999-2000 exhibiting signs of inflation rates to rule at low levels. The same pattern is not reflected in the old series.

8.10 The major group "Manufactured products" reveals sustained low to medium rates of inflation during a major part of the post-revised series. The year 1994-95 opened with a high inflation rate and remained high for the greater part of 1995-96. In the last quarter of 1995-96, inflation rates moderated and then declined to low rates for both the years 1996-97 and 1997-98. And then in 1998-99, price increases of "Manufactured products" firmed up to rule at moderate rates and then declined again in the first quarter of 1999-2000. While this manner of movement at low to moderate levels have imparted a good degree of moderation to the overall inflation measures for "All commodities", price movements in "Primary articles" and "Fuel, power, light and lubricants" have introduced some noises in the system. In "Fuel, power, light, and lubricants" price trends have been generally high, except for a moderate phase in the year 1995-96 and low to negative in the trailing 12 months. While trends in "Food articles" prices have been generally high, "Non-food articles" reveal a cyclical pattern, which is however quite different from the phases of cycles noticed in the "Minerals" group.

8.11 It is important to note that a major change in practice has occurred in the treatment of crude oil prices in the indices. In the old series, price quotations for imported petroleum crude oil were made in US dollar values and then their equivalent rupee values were calculated. The new series has discontinued the practice of including crude oil prices. However, its weight in the base year has been retained for calculation of the new price series and the same weight has been added to the mineral oils group in the major group of "Fuels, power, light and lubricants" and thus shifted from the major group "Primary articles".

8.12 Some broad trends which have been indicated above seem to conform with the notions of change that would occur in a period of dozen years with a host of new commodities replacing a set of others whose markets have begun to atrophy. It is also observed that "Manufactured products" prices behaved in comparatively orderly fashion during the period of analysis, despite phases of low to moderate and some high inflation rates. Averaged out over the period, they also increased the least. It is expected that with greater integration with the international community in the WTO regime to which India is a party, and trade taking place through moderate tariff levels and much less of quantitative restrictions as already committed, greater orderly patterns would tend to appear in non-manufactured products also. But it would be naïve to expect that phases and cycles would disappear with them.