Informist, Monday, Nov 13, 2023
By Shubham Rana
NEW DELHI – India has once again started discussing a proposal to bring in a producer price index to replace the Wholesale Price Index. This, economists say, is a welcome move as the current WPI is "outdated" and "not reliable".
The proposition is not new; indeed, government-level talks to introduce the producer price index date back nearly 20 years.
A working group for the revision of WPI, constituted in 2003, had looked into the feasibility of compiling a producer price index and subsequently, a switch to this from the WPI. In its technical report submitted in 2008, the working group said that the revision of the existing series of WPI should be prioritised and the development of a producer price index could be considered later.
Another working group, constituted in 2012 to revisit the WPI, recommended a producer price index on an experimental basis and then a migration to the producer price index from the WPI on a permanent basis.
In 2014, the government again formed a working group to specifically determine the methodology and data requirements for introducing a producer price index in India. The group submitted its report in 2017, by when the government had revised the base year of WPI to 2011-12. The government has not acted on the report since then.
The government constituted another working group in 2019 for the revision of WPI, seeking a roadmap for the switch from WPI to producer price index, among other things. This group has submitted a report to the government "some time back", a member of the working group told Informist. The report is yet to be made public.
India is also far behind many advanced and emerging market economies, most of which have already replaced WPI with PPI from well before the 2000s. The UK has been using the Producer Price Index since 1957, China since 1993, and South Korea since 1965. The US, too, has been using the Producer Price Index since at least 1947.
DIFFERENT WORKINGS
The WPI measures the average change in the wholesale prices of goods and is primarily used as a GDP deflator in India. The current series of WPI was adopted in 2017 with 2011-12 as the base year.
A producer price index, on the other hand, measures the average change in prices received by the product manufacturer or service supplier and excludes indirect taxes. It also accounts for services, which the WPI does not.
"Since we use the consumer price inflation (as a target and a benchmark measure), it is natural to use the producer price inflation as well. Consumers and producers are two parts of the system. In this context, WPI does not quite fit in," said economist Gurbachan Singh.
"Now, it is true that we have worked with a WPI, but it lacks clarity of purpose, which is what is sought to be corrected by bringing in producer price (index) inflation," Singh said.
WPI captures the price changes at the point of bulk transactions and includes taxes, distribution cost, transport cost, and margins. A producer price index excludes indirect taxes and margins. This, along with the fact that WPI does not include services, are the main reasons why the government is looking to bring in the producer price index.
"The issue with WPI is how do you account for services," a member of the government's current working group on the revision of the WPI index told Informist. "So, shifting to PPI comes as a natural conclusion for the committee," the working group member said on condition of anonymity.
In its report, the 2017 working group for introduction of PPI had said that the scope of the current WPI series was limited to commodity producing and energy sectors of the economy, and excluded the service sector, which covers about 40% of GDP.
While the proposed PPI is likely to include services, as is the norm globally, it is unlikely to resolve the issue completely, economists said.
"The PPI is a better measure (of inflation) but it is a more difficult data to collect," said Pronab Sen, former chief statistician of India. "PPI includes services but is notoriously difficult to work out...the US has same issues with PPI," Sen said. In the US, the PPI survey covers the entirety of the output of goods but covers only about 69% by value of services.
Another reason to shift to PPI from WPI is to remove the bias of double counting.
According to a commerce ministry document, PPI removes the multiple counting biases inherent in WPI. "PPIs can be compiled separately for output PPIs, input PPIs and export and import PPIs. The in-built stage of processing indices can be compiled to avoid multiple counting," the ministry said.
The renewed talks about the introduction of PPI are a positive step, but a transition is unlikely in at least the next few years, considering the WPI calculation is set to be revised alongside the revision of the CPI, which itself is not expected before 2025. So, any shift from WPI to PPI is most likely only after that. End
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