A new index at the factory gate: Why India's PPI matters beyond inflation

After more than two decades in the making, India's Producer Price Index is beginning to reshape industrial output, GDP measurement and the country's broader statistical framework

When the government unveiled India's first Producer Price Index (PPI) on June 15, it was easy to mistake the announcement for yet another statistical index. In reality, it marked the culmination of a reform that had taken more than two decades to trudge through committees and consultations before finally crossing the finish line. 

 

The significance extends well beyond a new inflation measure. Within weeks of its launch, the PPI began feeding into the Index of Industrial Production (IIP). The statistics ministry is also preparing to use it to deflate nominal output while estimating real gross domestic product (GDP), with a revised back-series expected in August.

 

That makes the PPI more than just another data release. It is becoming part of the machinery through which India measures the pace of economic growth itself.

 

For decades, India has relied on the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) to track inflation. The WPI captures prices at the wholesale stage, while the CPI measures what consumers ultimately pay. The missing link has always been prices received by producers at the factory gate — precisely the gap the PPI is designed to fill.

 

That distinction matters because national income accounting requires an appropriate price measure to separate changes in output from changes in prices. The closer the price index is to the point where production occurs, the more accurately economists can estimate real growth.

 

Story so far

 

The idea of replacing the WPI with a PPI has been on the policy agenda for more than two decades. The Abhijit Sen Working Group, constituted in 2003 to revise the WPI, examined the feasibility of introducing a PPI and eventually migrating to it, but recommended that priority be given to updating the existing WPI. That recommendation was reiterated by the Saumitra Chaudhuri Working Group in 2012, which called for developing a PPI on an experimental basis in line with international practice.

 

The groundwork finally took shape in 2014, when the government constituted a working group under former National Statistical Commission member B N Goldar to develop the methodology and data framework for India’s first PPI. After nearly three years of work, the committee submitted its report in August 2017. In parallel, an expert committee chaired by economist C P Chandrasekhar developed experimental Service Price Indices for sectors such as banking, insurance and transport, providing the foundation for the services PPI that has now been introduced.

 

The proposal, however, ran into practical constraints. Collecting factory-level transaction prices across thousands of products required a statistical infrastructure that was still evolving.

 

P C Mohanan, former acting chairman of the National Statistical Commission (NSC), says another reason for the delay was a perception that India’s WPI already resembled a PPI closely enough to make the exercise unnecessary.

 

The project regained momentum only in December 2024, when the government constituted an 18-member working group under NITI Aayog member Ramesh Chand to finalise both the revised WPI basket and the methodology for India’s PPI. 

 

Three indices, not one

 

What was launched on June 15 was not a single index but an entire producer-price framework. The output PPI (goods) tracks prices received by manufacturers when goods leave the factory gate. Alongside it is an experimental input PPI (goods), measuring prices manufacturers pay for raw materials and intermediate goods, and a quarterly services PPI covering seven sectors in its first phase. Together, they begin to map price formation across different stages of production rather than only at wholesale or retail markets.

 

The WPI itself—now in its eighth base-year revision since its introduction during World War II in 1942—also received a significant overhaul. Its base year has been shifted to 2022-23, the commodity basket expanded to 957 items from 697, and newer products such as electricity generated from solar, wind and nuclear sources incorporated into the index.

 

Importantly, the WPI is not disappearing. It will continue to be published alongside the PPI for the next five years, giving policymakers, researchers and businesses time to compare the two series before any longer-term transition.

 

Best practices

 

Globally, India is among the last major economies to introduce a formal producer price index. The United States has compiled such a series for well over a century. Its origins can be traced to an 1891 Senate resolution examining how tariff laws affected prices. The index itself began as the Wholesale Price Index in 1902 before being renamed the Producer Price Index in 1978 — an evolution that mirrors India’s own shift from wholesale prices towards producer prices.

 

The US experience also illustrates how statistical systems evolve over time. Initially covering only goods, the American PPI expanded in 2014 to include services, construction, government purchases and exports. India’s own rollout follows a similar sequencing, beginning with goods while gradually extending coverage to services and production inputs.

 

The broader rationale is well established internationally.

 

The IMF’s Producer Price Index Manual, prepared jointly with the International Labour Organisation, OECD, United Nations and World Bank, identifies one of the PPI’s principal uses as serving as a deflator for converting current-value production into constant-price output in national accounts.

 

The US Bureau of Labour Statistics similarly notes that PPI data is routinely used to adjust economic series for inflation when estimating constant-dollar GDP.

 

The same logic now underpins India’s statistical transition.

 

Why it matters

 

N R Bhanumurthy, director of the Madras School of Economics, said the importance of the new index lies in filling a gap that neither the WPI nor the CPI was designed to address.

 

“Right now, the WPI and CPI only tell you the price build-up from the wholesale market to the retail market. What is required is the price build-up from the production side to the consumption side. That will be possible when we have a producer price index,” he added.

 

That additional layer of information could eventually reshape more than national accounts. Producer prices often respond earlier than retail prices to movements in commodity costs, exchange rates and supply-chain disruptions. Over time, the PPI could therefore become an important leading indicator of inflationary pressures working their way through the economy.

 

Bhanumurthy also believes that once the index matures, policymakers may consider giving it a more prominent place in the Reserve Bank of India’s analytical toolkit alongside the CPI, even though retail inflation is likely to remain the formal monetary policy target.

 

The first evidence of the PPI’s impact has already emerged.

 

With the new methodology incorporated into the IIP, industrial production growth for FY25 has been revised lower by around 130 basis points, while growth for FY26 remains broadly unchanged.

 

That revision does not imply that factories suddenly produced less. Rather, it reflects a different estimate of how much of the increase in nominal output came from higher prices and how much represented genuine increases in production volumes.

 

The same exercise will now extend to GDP. When the revised back-series is released in August, economists will obtain a clearer picture of how much of India’s recent growth reflects real expansion rather than changes in prices.

 

After more than twenty years of discussion, India has finally built that missing piece of the statistical architecture.