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Inflation index for services on cards

G. Rambabu

NEW DELHI, June 23

THE Government has embarked on an ambitious plan to develop, for the first time, a suitable index of prices in the services sector, which, when coupled with the wholesale price index (WPI), will give a more accurate representation of inflation in the eco nomy.

According to official sources in the Ministry of Commerce & Industry, a sub-group has been constituted for this purpose which has already started deliberating on the issues and problems that may have to be tackled in this regard.

They noted that to start with, an in-principle decision has been taken to include financial intermediation, transport, communications and construction activity in the services inflation index. Later on, the scope of the index will be enhanced to extend i t to the other services.

``While in some segments of financial instruments, wholesale trade may very well take place, in others such as personal services, a wholesale market may not exist. All these aspects have to be taken into consideration,'' they pointed out.

The sources said that this decision to widen the boundaries of the official measure of inflation, the WPI, has been in the reckoning for quite sometime now. But it only now that the process has been initiated with the formation of the sub-group.

Since the services sector constitutes nearly one half of the economy and is growing in importance, a combination of the WPI and the services index should look more akin to the national income deflator, which incorporates all activities in the economy, th ey said.

The sub-group is already aware of the practical problems that would emerge if the services index were to be implemented immediately. Hence, it has decided to study the issue thoroughly before giving its go-ahead to the creation of a new index, they said.

``First and foremost is the problem of availability of data on different services sectors on a continuous basis. Then comes the problem of identifying services purchased by producers and services purchased by consumers. Apart from that there is also the need for mixing and matching data collected from administered prices as well as from market prices for services rendered. Then, of course, there is major problem of non-tradable services,'' they said.

The sources noted that since it would take a long time to sort out these issues, it has been decided to narrow down on the prices of services that are easily available. It is for this reason that the index will concentrate only on financial intermediatio n including banking and insurance, transport services (road and rail), communications and construction activity.