The Hindu Business Line : New WPI series should be broken up

Bangalore, Oct 10 Even as a new wholesale price index (WPI) is expected to come into effect in early 2009, a number of methodological issues remain to be resolved. Little attention has been paid to whether WPI, taken as a whole, is a reliable policy guide to assessing price rise. The recent report of the technical group, which has drawn up the new WPI series, merely touches upon the subject of whether WPI should be broken into core (non-volatile) and headline (volatile) components.

Monthly basis

The report favours reporting WPI movements on a monthly basis, citing the availability of more reliable data over a longer period, while suggesting that food and energy price movements can be reported on a weekly basis. Such segregation will lead to better information in the public domain on the causes of price rise, even if it inconveniences the government of the day.

The issue assumes significance in view of the fact that the new WPI is expected to incorporate price movements of 1,224 items, as against the current 435. A larger index is likely to iron out price changes in volatile items such as food and energy, more so the former as the weight of primary articles will fall from 22.02 per cent in the current WPI to 20.11 per cent. Fuel and power will have a weight of 14.91 per cent, as against the current weight of 14.23 per cent.

The weights are derived on the basis of the traded value of goods in the wholesale market. In view of the increased availability of manufactured goods in the post-reforms years, their number in the WPI will go up from 318 to 1,147. The weight of manufactured products will increase from 63.75 per cent in the current index to 64.97 per cent in the revised index.

Larger price index

A large price index will be a representative producer price index, but it may not serve as a policy guide to short-term inflation, unless it is broken up into core and headline components.

The larger index marks the first attempt to include unorganised sector products, which account for 35 per cent of manufacturing output or over 300 items in the new index.

Compilation of data

The office of the Development Commissioner for Small Scale Industries will play the lead role in collecting data for WPI in this respect, with the National Sample Survey Organisation pitching in. This could lead to improved tax compliance. WPI is compiled on the basis of voluntary filing of price data, which leads to inadequate submissions. One of the four sub-committees in the technical group has suggested the involvement of industry chambers to overcome this problem.

In agriculture products, the report points out that it is hard to compute marketable surplus, basic prices, taxes and subsidies.

While lime, sweet lime, watermelon, pumpkin and beans find a mention in the new index, the growing role of floriculture will also be captured.

Despite the improved coverage of WPI, it leaves out services, which account for 60 per cent of the gross domestic product. The issues of computation involved in the services sector remain to be tackled.

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