Panel gets more time to study new index to gauge inflation

Deadline extended by three months to March 31 for submitting report

After a push from the Prime Minister's Office (PMO), a committee headed by Planning Commission member Saumitra Chaudhuri seems to be giving its full attention in moving towards a Producers Price Index (PPI), which will give an accurate calculation of  inflation.  The government has extended its deadline by three months till March 31,2014 to give its report.

The committee was supposed to give its report by Tuesday. However, it got delayed because “internal deliberations are not complete”. It has now received a major push from the PMO to “study the feasibility of bringing out PPI” after the government faced sharp criticism for the rise in the prices of essential commodities and the Congress’ rout in the recent Assembly elections , a senior official involved in the process told Business Standard.

The government believes the current  Wholesale Price Index (WPI) does not give the correct picture and PPI is expected to give a better idea of price movements. The committee is also looking at revamping WPI.

According to the official, the government is concerned the committee has not been able to garner any consensus yet on the new index.

Another official, who is also part of the committee, said the panel is finding it difficult to calculate a correct measure of PPI as there is not enough information on producer prices.

“In India, it is very difficult to estimate how much a producer gets for his produce as there are a lot of intermediaries in between,” the official remarked.

PPI is a measure of change over time in the selling price of output for producers. It is usually the first commercial transaction in goods and services produced, which gives an idea of margins on different products and incidence of taxes. It indicates the cost pressures in an economy. Since it measures value addition in prices, input prices have to be deducted to arrive at PPI. Most countries have PPI instead of WPI. The US switched to the PPI model in 1978.

The Saumitra Chaudhuri committee is also likely to recommended a larger number of items in the new wholesale price index, which will have a new base year of 2009-10 against the present 2004-05. The product line of basket for the new WPI will largely be similar at least for manufacturing sector, an official said.

Apparently, in its report, the committee is expected to suggest that the index should have adequate format for automatic up-gradation to 2011-12 base year as soon as new inputs come.

The government had constituted a high-powered panel under the chairmanship of the Planning Commission in April last year following strong criticism over the manner in which WPI was being calculated. The committee’s tenure was originally to end in December, 2012.

The committee was advised to take into account structural changes in the economy since 2004-05 to present a better picture of price situation.

There were reports of error in the updated series. Economists as well as the Reserve Bank of India have been critical of the WPI data.

The new series of the WPI, the government's main tool for monitoring the priceline, was launched in September 2010 to give a more accurate picture of inflation.

The new WPI, with 2004-05 base, comprised 676 items against 435 items in the old index. The number of price quotations for the new series was 5,482 against 1,918 in the old series.

The committee will also suggest ways to ensure smooth flow of data and also to look into the possibility of having a single agency for collecting data for WPI and the index of industrial production.