Govt may adopt PPI for tracking wholesale rates
India plans to adopt a producer price index (PPI) to better track wholesale prices, replacing the outdated wholesale price index (WPI).
India is poised to shift to a more robust tracker of changes in wholesale prices, known as the producer price index (PPI), a model for which is ready and being evaluated by a multi-department team, government officials said.
The country currently uses the wholesale price index (WPI), adopted in the 1970s, to measure bulk rates of 117 primary articles, 16 fuel and power items and 564 manufactured products, covering most-transacted items in the economy.
Most developed economies use PPI to track producers’ prices , in line with the UN’s global System of National Accounts, which lays down methodologies for calculating key indices, such as gross domestic product (GDP), which is a measure of the total value of goods and services produced by an economy.
The ministry of statistics uses a WPI-based ‘deflator’ to calculate real or inflation-adjusted GDP growth. A GDP price deflator measures how much the value of GDP goes down after adjusting it for inflation.
The Reserve Bank of India (RBI) uses the retail-level Consumer Price Index or CPI for inflation forecasting and inflationary expectations, which is a survey of how consumers think prices are likely to behave. This has a bearing on how inflation actually plays out.
“The model is ready and has been built in consultation with the International Monetary Fund for the purpose of methodology. It will be vetted by the National Statistical Commission,” an official said, requesting anonymity.
Unlike the WPI, the PPI doesn’t include indirect taxes and logistics cost. The WPI, which doesn’t truly capture producer-level prices, also doesn’t include the services sector, which accounts for 55% of India’s GDP.
Government economists have long wanted a shift from WPI also because of its inherent inadequacies. For instance, the WPI almost inevitably double counts the same commodity unlike PPI, which captures prices domestic producers get at different stages of production of a finished item, a second official said.
“The government has to decide on what type of services to include in the PPI and how much weight should be assigned to various items to arrive at a correct picture of inflation,” said PC Mohanan, former acting chairman of the National Statistical Commission.
During its roll out, which officials say will still take a while, both the PPI and WPI will be used to calculate wholesale inflation to manage the transition, experts said.
In 2017, a working group on PPI set up by the commerce and industry ministry and headed by economist BN Golder recommended aligning the wholesale inflation barometer with the UN-derived PPI.