7.10        ndian    onom
     to an episodic price rise pertaining to one or a       in price level by a factor of 4. GDP deflator is
     small group of commodities. This leaves a third        acclaimed as a better measure of price behaviour
     phenomenon, namely one in which there is a price       because it covers all goods and services produced
     rise of one or a small group of commodities over       in the country (because the weight of services
     a sustained period of time, without a traditional      has not been equitably accounted in the Indian
     designation. ‘Skewflation’ is a relatively new term
                                                            ‘headline inflation’, i.e., inflation at WPI).
     to describe this third category of price rise.
          In India, food prices rose steadily during
                                                               Base effect
     the last months of 2009 and the early months of
     2010, even though the prices of non-food items         It refers to the impact of the rise in price level (i.e.,
     continued to be relatively stable. As this somewhat    last year’s inflation) in the previous year over the
     unusual phenomenon stubbornly persisted,               corresponding rise in price levels in the current
     policymakers conferred on how to bring it to an        year (i.e., current inflation). If the price index had
     end. The term ‘skewflation’ made an appearance
                                                            risen at a high rate in the corresponding period of
     in internal documents of the Government of
                                                            the previous year, leading to a high inflation rate,
     India, and then appeared in print in the Economic
     Survey 2009–10 GoI, MoF.                               some of the potential rise is already factored in,
                                                            therefore, a similar absolute increase in the Price
          The skewedness of inflation in India in the
     early months of 2010 was obvious from the fact         index in the current year will lead to a relatively
     that food price inflation crossed the 20 per cent      lower inflation rates. On the other hand, if the
     mark in multiple months, whereas wholesale price       inflation rate was too low in the corresponding
     index (WPI) inflation never once crossed 11 per        period of the previous year, even a relatively
     cent. It may be pointed out that the skewflation has   smaller rise in the Price Index will arithmetically
     gradually given way to a lower-grade generalised       give a high rate of current inflation. For example:
     inflation (with the economy in the middle of 2011                   Price index                 Inflation
     inflating at around 9 per cent with food and non-               2007 2008 2009      2010   2008 2009 2010
     food price increases roughly at the same level).         Jan     100    120    140   160    20 16.67 14.29
          Given that other nations have faced similar            The index has increased by 20 points in all the
     problems, the use of this term picked up quickly,      three years, viz., 2008, 2009 and 2010. However,
     with the Economist magazine (January 24, 2011),        the inflation rate (calculated on ‘year-on-year’
     in an article entitled ‘Price Rises in China: Inflated basis) tends to decline over the three years from
     Fears’, wondering if China was beginning to suffer     20 per cent in 2008 to 14.29 per cent in 2010.
     from an Indian-style skewflation.                      This is because the absolute increase of 20 points
                                                            in the price index in each year increases the base
     gDP DeflAtor
                                                            year price index by an equivalent amount, while
     This is the ratio between GDP at Current Prices
                                                            the absolute increase in price index remains the
     and GDP at Constant Prices. If GDP at Current
                                                            same. The ‘year-on-year’ inflation is calculated by
     Prices is equal to the GDP at Constant Prices,
                                                            the formula :
     GDP deflator will be 1, implying no change in
     price level. If GDP deflator is found to be 2, it           Current Inflation Rate = [(Current Price
     implies rise in price level by a factor of 2, and if   Index – Last year’s Price Index)] ÷ Last year’s Price
     GDP deflator is found to be 4 , it implies a rise      Index] x 100