The Department for Promotion of Industry and Internal Trade (DPIIT) is set to finalise a model for the introduction of a Producer Price Index (PPI) in India, which could eventually replace the Wholesale Price Index (WPI).
PPI measures wholesale prices from the perspective of producers of goods and services by tracking prices at different stages of production. It has replaced WPI in most countries because it is conceptually consistent with the internationally agreed System of National Accounts (SNA) for compiling measures of economic activity.
“There has been consultation with the Ministry of Statistics and Programme Implementation (Mospi). The National Statistical Commission should see it at least once before submitting it to higher authorities… The model from our side is final and we have taken into account the advice of the International Monetary Fund on the methodology. The necessary procedural approvals will be worked out. That process is going on but I cannot give a timeline,” DPIIT secretary Rajesh Kumar Singh said on Thursday.
Ultimately, WPI may be replaced by PPI as it is used by most developed countries, Singh said, adding that a decision on this was still in the consultation phase. “However, there will be a transition phase where both WPI and PPI will coexist.”
IDEA BEHIND REPLACING WPI
WPI has a built-in bias due to double counting of the same product
Does not include export and import
Excluding the service sector, which represents about 55% of GDP
PPI is conceptually consistent with international standards
A better deflator for calculating real GDP than the WPI
PC Mohanan, former acting chairman of the NSC, said the process of switching from WPI to PPI was likely to take longer as the government would have to deal with issues such as preparing proper samples, assigning weightage and determining the periodicity of price collection.
“The biggest problem will be to determine which services to include. What type of services will serve as the right representative of the sector? Then there is the question of assigning weightings to the chosen goods and services. This will undoubtedly take time. Also, the periodicity of the price collection, whether monthly or weekly, needs to be determined,” he said.
The government has been trying to determine a methodology for setting up a PPI in the Indian context for over two decades. The biggest challenge is to find one that improves on the existing WPI.
According to a 2017 report submitted by a working group on PPI under the Ministry of Trade and Industry and headed by economist BN Golder, many developed and emerging economies have switched from WPI to PPI since the 1970s.
“The underlying motivation behind the shift from WPIs to PPIs in all these countries was to remove the double/multiple counting bias inherent in WPIs, and to construct indices that are conceptually consistent with the National Accounts Statistics (NAS) for use as deflators,” the report said.
Furthermore, the current WPI series has a limited scope, as it excludes the service sector, which represents a large share of gross domestic product (GDP).
However, due to its much longer history, the WPI is still the most widely followed measure of inflation. It is used as one of the deflators along with the Consumer Price Index (CPI) to calculate real GDP from nominal GDP.
Singh said the government was separately looking at changing the current base year of 2011-12 for WPI. “That is also one of the issues that the government is considering. The government, including Mospi, is looking at other statistical indicators like CPI and various other indicators. I guess eventually you can expect some kind of update of the base year. But whether there will be one specific base year or some other base year – because our studies show that other countries have multiple base years for different kinds of indices – it is an ongoing process. Unless we have a decision, I cannot really say,” Singh told reporters.
(Shiva Rajora contributed to this story)
First print: 05 Jul 2024 | 00:01 IST