IASbaba’s Daily Current Affairs – 20th September, 2016

IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs Sep 2016, UPSC

IASbaba’s Daily Current Affairs – 20th September, 2016

ECONOMY

TOPIC:General Studies 3

Indian Economy and issues relating to planning mobilization of resources, growth, development, and employment.

WPI and CPI differences.

WPI and CPI based inflation

We come across Wholesale Price Index (WPI) based inflation and Consumer Price Index (CPI) based inflation in news often. Let us know what these are

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What is the purpose of a price index?

The purpose of a price index is to quantify the overall increase or decrease in prices of several commodities through a single number.
The price index is measured at fixed intervals and changes in it are an indicator of average price movement of a fixed basket of goods and services (that represent the entire economy).
Thus, price index is reflective of the total change in price level paid by a producer or consumer.

2DNA 20th Sep

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What is ‘Wholesale Price Index’?

Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers.
WPI is used as an important measure of inflation in India. Fiscal and monetary policy changes are greatly influenced by changes in WPI.

In India, wholesale price index is divided into three groups:

Primary Articles (20.1% of total weight)
Fuel and Power (14.9%) and
Manufactured Products (65%)

Primary Articles
1. Food Articles
2. Non-Food Articles
3. Minerals

Food Articles from the Primary Articles Group account for 14.3%of the total weight.

Fuel, Power, Light & Lubricants
1. Coal
2. Mineral oils
3. Electricity

Manufactured Products
1. Food products
2. Beverages, Tobacco and Tobacco Products
3. Textiles
4. Leather and leather products
5. Wood and wood products
6. Paper and paper products
7. Rubber and plastic products
8. Chemicals & chemical products and
9. Several others.

The most important components of the Manufactured Products Group are Chemicals and Chemical products (12% of the total weight); Basic Metals, Alloys and Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%).

What is Consumer Price Index (CPI)?

Consumer Price Indices (CPI) measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption.
It is the index of price prevailing in the retail market.
CPI is widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices.

CPI is more relevant to the customer, since it measures changes in retail prices. CPI represents basket of essential commodities purchased by average consumer-food, fuel, clothing etc.

The number of items in CPI basket include 448 in rural and 460 in urban. Thus, it makes it clear that CPI basket is broader than WPI basket.

Consumer Price Indices (CPI) released at national level are:

CPI for Industrial Workers (IW)
CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)
CPI (Rural/Urban/Combined).

While the first two are compiled and released by the Labour Bureau in the Ministry of Labour and Employment, the third by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.

What is the difference between WPI and CPI inflation?

In the Indian context, 5 national indices are accounted for inflation measure that include WPI and other four CPI indices.

WPI based inflation:

WPI index reflects average price changes of goods that are bought and sold in the wholesale market. WPI in India is published by the Office of Economic Adviser, Ministry of Commerce and Industry.
Further, the data for WPI is monitored and updated on a weekly basis taking into account all the 676 items that form the index.
An, important point to take note of is the whole sale price index (WPI) does not includes the cost of services.
Further, as WPI accounts for changes in general price level of goods at wholesale level, it fails to communicate actual burden borne by the end consumer.
WPI is the primary measure that is used by the Indian central government for ascertaining inflation as WPI in contrast to CPI accounts for changes in price at an early distribution stage.

CPI based inflation:

In contrast, CPI is computed by executing a weighted average on a particular set of goods and services.
The computation of CPI takes into account price changes and the actual inflation that affects the end consumer.
CPI is thus a reflection of changes in the retail pricesof specified goods and services over a time period which are traded by particular consumer group.

Note: Current WPI Base year is 2004-05=100. It is worth to note that the base year for CPI is 2012 currently.

Crux:

Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is used for adjusting income and expenditure streams for changes in the cost of living.
WPI is based on wholesale prices for primary articles, administered prices for fuel items and ex-factory prices for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution costs and taxes.
Prices for WPI are collected on voluntary basis while price data for CPI are collected by investigators by visiting markets.
CPI covers only consumer goods and consumer services while WPI covers all goods including intermediate goods transacted in the economy.
WPI weights primarily based on national accounts and enterprise survey data and CPI weights are derived from consumer expenditure survey data.

Does RBI use WPI or CPI Inflation to manage monetary policy?

While earlier the Reserve Bank of India used WPI inflation to manage monetary policy expectations, it is now the CPI inflation which is largely taken into account. The RBI highlights its inflation expectations based on the CPI inflation data that comes in. For example, it sets targets on CPI Inflation and monitors it accordingly.
Many analysts for long had suggested that the RBI should move to the CPI data vs the WPI data, which had now happened in the last couple of years.

WPI Inflation Vs CPI Inflation: Which should you keep in mind?

For the common man it is always better to keep retail inflation which is the CPI or the Consumer Price Inflation number in mind. It is a better measurement of what is largely happening with consumer prices.
WPI inflation on the other hand is better known to individuals who track the wholesale prices and is of better significance to them. In any case both are a measure of inflation.

Connecting the dots:

Should India use both the indices, CPI and WPI, for inflation measurement and inflation targeting? Give your arguments and substantiate.
While earlier the Reserve Bank of India used WPI inflation to manage monetary policy expectations, it is now the CPI inflation which is largely taken into account. Discuss why?
What is the purpose of price index? Highlight the main differences between WPI and CPI.

Related articles:

Diverging CPI, WPI: The inflation conundrum

TLP 2015

DEFENCE/NATIONAL

TOPIC:

General Studies 3

Security challenges and their management in border areas; linkages of organized crime with terrorism.
Role of external state and non-state actors in creating challenges to internal security.

General Studies 2

India and its neighbourhood- relations.

Uri terror attack- What are India’s choices?

In news:Over the last three decades or so, India has been at the receiving end of Pakistani statecraft of terrorists and Uri attack is the latest provocation.While India has said it will give a befitting reply at a time and place of its choosing, we shall consider the options available to solve the never-dying problem.

Background

The Indian security forces have been dealing with militancy and cross-border infiltration since Kashmir went up in flames in the late 1980s. The gradual decline in violence in the Valley over the years was reversed, starting in 2014, and since then strife in the Valley and infiltration from the Pakistan side have both steadily climbed.
In the latest Uri attack, the gathering of evidence regarding the four terrorists suggests they are from Pakistan and had been sent across the border explicitly for this attack.
In fact, the entire operation has the fingerprints of Pakistan’s military establishment, showing yet again the country’s persistent use of terrorism as state policy.

Let us look at some options which the government might consider to tackle the ‘state sponsored terrorism’

Diplomatic approach

Some previously tried options

Stern statements to Pakistan and demanding thorough investigation
Downgrading relations with Pakistan (As done after 2001 Parliament attack)
Sending envoys to major world capitals, gathering support for action against Pakistan for sheltering Jaish-e-Mohammad and Lashkar-e-Toiba amongst other terror groups.
Use the ongoing United Nations General Assembly (UNGA) session to introduce a resolution condemning cross border terror.
Raise support to Balochistan freedom movement, raise human rights violations by Pakistan.

However, these actions have hardly proved to be effective in the past.The diplomatic pressure works only when India and Pakistan have talks ongoing that are making progress. At present, talks have been called off and there is no dialogue process.

Isolating Pakistan internationally

Designating Pakistan as a’state sponsors of terror’.
Given the worldwide intolerance for terrorism, fear of Islamist radicals and ISIS spreading, as well as general mistrust of Pakistani actions due to Afghanistan, India can make some headway to isolate Pakistan.

Even this option is long and a tough drag as in the past India has faced many difficulties with moving the U.N. on the Comprehensive Convention on International terrorism.

Additionally, there is a threat of internationalising Kashmir disputewhilst appealing internationally.

Non-adherence to Indus water Treaty

Asking Pakistan to honour its anti-terror commitment else treaty shall collapse.
In the absence of an enforcement mechanism in international law, nothing can stop India from emulating Pakistan’s example in not honouring its bilateral commitments.

Economic approach

Snapping all trade ties with Pakistan, suspending transactions across Wagah and Uri.
Banning all Pakistani imports to India.
Appealing to other countries to reduce economic activity with Pakistan.
Asking U.N. to impose sanctions against Pakistan.

This will not have much impact as India and Pakistan have a small direct formal trade (2.3 billion USD) and informal trade of 4.7 billion USD. However, snapping of economic ties will affect the people of Kashmir as they use LoC for fruit trade.

Also, UN sanctions require UNSC resolution, and it will be most definitely blocked by China.

Military approach

An army raid across the Line of Control, an army incursion across the international border with Pakistan, a naval blockade of Karachi, an air strike on the Jaish headquarters in Bahawalpur, an air strike on camps in Pakistan-occupied Kashmir— these are few options which are running high on emotional value but there are lots of concerns with military actions.
The Indian military is short of vital equipment like artillery and air-defence systems, as well as key ammunition. The air force is also not in particularly great form given the steady attrition it has faced without getting adequate replacements. Thus, the Indian armed forces are not in particularly good shape for an all out war with Pakistan.
Also, Defence officials are understood to have indicated that a “swift strike” may be unfeasible, and could cause “civilian casualties.”
The localised battles along the LoC, with Indian and Pakistani forward positions trading fire, could facilitate infiltration — thus helping jihadist groups already operating against the Army inside Kashmir.
India has to keep the Jammu and Kashmir dispute separate from its bilateral relation with Pakistan.

Other approaches

Dialogue approach– Talks at DGMOs (Directors General of Military Operations) levels is possible but it is a formality. After Pathankot attack and Mumbai, intelligence was shared but there was no outcome from it. Instead, National Security Advisers of both countries should meet which provides platform for high level talk.
Do nothing at borders– The foremost goal should be securing Kashmir’s internal security, and maintaining counter-infiltration defences. Vengeance should not over power better senses for future options. India has to acknowledge its limitations while going at a war with Pakistan where it knows the problems but doesn’t have adequate resources to solve it.

Conclusion

Uri attack and Kashmir dispute has shown that India needs a long-term strategic policy on cross border terrorism as well as have a comprehensive national policy to deal with domestic militancy.
Due to India’s incomplete and inconsistent responses, the adversaries, both states and terror organisations, are able to exploitthe lack of a robust national doctrine.
The modernisation of India’s military has been slow, denying it the ability to stage precision operations. Moreover, the Central government has cut funding for police modernisation, and the intelligence services are short-staffed — denying it the capacity to soak up retaliatory blows.In addition, the army should analyse the reason for such incidents and lacunas present.
India needs to let its adversaries know it is a power capable of more than mere rhetoric — while assuring its own people that its options are rooted in constitutional values.

A stable country runs on planning and not on sentiments.

Connecting the dots:

India and Pakistan relations werealready nosediving and Uri attack has further worsened the situation. How should India react? Critically analyse
Is there any possibility of improvement in India-Pakistan relations? Discuss.