Producer Price Index (PPI)

The Department for Promotion of Industry and Internal Trade (DPIIT) is nearing the completion of a model to introduce a Producer Price Index (PPI) in India, which could potentially replace the Wholesale Price Index (WPI).

Wholesale Price Index (WPI)

• About: The Wholesale Price Index (WPI) represents the price of goods at the wholesale level, meaning goods sold in bulk and traded between organisations rather than directly to consumers. It is used as a measure of inflation in some economies.
• Calculation : WPIs are reported monthly to reflect average price changes of goods. The total costs of goods in a given year are compared to the total costs in the base year. 
  • The base year’s total prices are set at 100 on the scale.  Prices from other years are compared to this total and expressed as a percentage change.
• Wholesale Price in India: The Wholesale Price Index (WPI) is an important measure of inflation in India, focusing solely on changes in the prices of goods. 
• Published by: WPI data is published by the Office of Economic Adviser, Ministry of Commerce and Industry, Government of India. 
• Revisions: The current WPI series, with a base year of 2011-12, is the seventh revision and has been in use since 2017.
• Importance: It is a simple and convenient method for calculating inflation, and changes in WPI greatly influence fiscal and monetary policy decisions.

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Components of Wholesale Price Index (WPI)

• Primary Articles: This category is divided into Food Articles and Non-Food Articles (such as Oil Seeds, Minerals, and Crude Petroleum).
• Fuel & Power: This component tracks price movements in Petrol, Diesel, and LPG.
• Manufactured Goods: This is the largest basket and includes Textiles, Apparel, Chemicals, Cement, Metals, Sugar and Tobacco Products, Vegetable and Animal Oils, among others.
• WPI Food Index: This sub-index within the WPI includes Food Articles from the Primary Articles category and food products from the Manufactured Products category.

Challenges associated with Wholesale Price Index (WPI)

• Public Relevance: It does not reflect inflation at the consumer level, as ordinary people do not buy products at wholesale prices.
• Exclusion of Service Sector: WPI excludes the service sector, which accounts for about 55% of GDP.
• Bias and Double Counting: WPI has an inherent bias due to double counting of products and does not include exports and imports.

Producer Price Index (PPI)

• About: The Producer Price Index measures the average change in prices received by producers for goods and services sold domestically or exported.
• Types: 
  • Output PPI, which measures the prices of goods and services leaving production sites.
  • Input PPI, which measures the prices of goods and services entering production processes.
• Advantages: It examines inflation from the perspective of industry and business, measuring price changes before consumers purchase final goods and services. 
  • It has supplanted WPI in many countries because it aligns conceptually with the internationally recognized System of National Accounts (SNA) for compiling measures of economic activity.

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Need for a new Model of Producer Price Index (PPI)

• Addressing Biases: The updated PPI model seeks to replace WPI, addressing issues like double counting, exclusion of exports/imports, and the omission of the service sector (which constitutes 55% of GDP). 
  • It has been presented to the IMF, and discussions are ongoing to shift from WPI to PPI, in line with practices adopted by most G20 economies.
• Proposed Changes: Discussions are underway within the government to change the base year of the Wholesale Price Index (WPI) from 2011-12, involving the Ministry of Statistics and Programme Implementation (MoSPI) and the National Statistical Commission.