DPIIT close to finalising model to launch Producer Price Index in India

Producer price index may eventually replace WPI

The Department for Promotion of Industry and Internal Trade (DPIIT) is close to finalising a model to launch a Producer Price Index (PPI) in India that may eventually replace the Wholesale Price Index (WPI).

PPI measures wholesale prices from the point of view of producers of goods and services by tracking prices at different stages of production. It has replaced WPI in most countries as it is conceptually in line with the internationally agreed System of National Accounts (SNA) to compile measures of economic activity.
 

“Consultations with the Ministry of Statistics and Programme Implementation (Mospi) have been done. The National Statistical Commission should see it once at least before it is placed before higher authorities… The model from our side is final and we have taken the International Monetary Fund’s advice on the methodology. The procedural clearances required will be worked on. That process is on, but I can’t give a timeline,” DPIIT Secretary Rajesh Kumar Singh said on Thursday.

                       

Eventually, WPI may get replaced by PPI since it is used by most developed countries, Singh said, adding that a decision regarding this was still at a consultation stage. “However, there will be a transitional phase where both WPI and PPI will co-exist.”

IDEA BEHIND REPLACING WPI
 

WPI has an inbuilt bias due to double counting of same product

Doesn’t include exports and imports

Excludes the service sector, which covers about 55% of GDP

PPI is conceptually in line with international standards

A better deflator for calculating real GDP than WPI

P C Mohanan, former acting chairman of NSC, said the process to shift from WPI to PPI was likely to take more time as the government would have to grapple with the issues of preparing the right samples, assigning the weighting, and deciding on the periodicity of the price collection.
 

“The biggest issue will be to identify which services to include. What sort of services will serve as the correct representative of the sector? Then, there will be the issue of assigning weightings to the chosen goods and services. These are bound to take time. Also, the periodicity of price collection, whether monthly or weekly, has to be determined,” he said.
 

The government has been trying to determine the methodology for constructing a PPI in the Indian context for over two decades, the biggest challenge being finalising one that would make an improvement to the existing WPI.
 

According to a report submitted in 2017 by a working group on PPI, under the commerce and industry ministry and headed by economist B N Golder, many advanced and emerging economies have switched to PPI from WPI since the 1970s.

“The underpinning thrust of shifting from WPIs to PPIs in all those countries has been to do away with the bias of double/multiple counting inherent in WPI, and to compile indices that are conceptually consistent with the National Accounts Statistics (NAS) for use as deflators,” the report said.

Besides, the current WPI series has limited scope due to the exclusion of the service sector, which covers a major chunk of the gross domestic product (GDP).

However, due to the 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 working towards 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, looks at other statistical indicators, such as the CPI and various other indicators. I suppose you can expect some sort of an update of the base year eventually. But whether there will be one particular base year or different — because our studies show that other countries have multiple base years for different types of indices— it’s an ongoing process. Unless we have a decision, I can’t really say,” Singh told reporters.

(Shiva Rajora contributed to this story)