Editorial

Rebooting WPI

| Updated on June 13, 2021

Revisions are welcome but creation of a producer price index should be expedited

The draft technical report of the working group on revision of current series of WPI 2011-12 to new series 2017-18 is quite comprehensive and addresses changes that have occurred in usage of the output produced in the economy. But with the consumer price index becoming the key data point used to formulate monetary policy, the focus on WPI has reduced over the years. The index is mainly used as a deflator for nominal macroeconomic aggregates such as GDP and IIP and to determine escalation clause in infrastructure projects, revision of toll rates, tariff setting in ports, electricity and so on. The WPI, which was the primary inflation gauge prior to 2014, has an eclectic mix of primary commodities and manufactured products as its constituents, rendering it unsuitable as a measure of producer price inflation. There is a need for disseminating a Producer Price index (PPI), work on which is in progress. The sub-group to facilitate smooth transition from WPI to PPI needs to expedite the process. The PPI selects constituents based on supply use, thus avoiding double counting and will be a better measure of the inflationary pressure on businesses. A clutter of items that also find a presence in the CPI should be avoided.

That said, changing the base year for the WPI from 2011-12 to 2017-18 is required to reflect the structural changes in the economy, including demonetisation and GST. The working group has made a comprehensive evaluation of the changing consumption patterns of wholesale products and has expanded the basket. The number of items in the manufactured products index has increased from 564 in the current index to 1,026, number of primary articles index from 117 to 131 and fuel and power index from 16 to 19. Using the average consumption of three years from 2015-16 to 2017-18 is a good way to smoothen the short-term volatility in prices. But average of five years instead of three years could have been considered. As the report points out, the weight of primary articles in the new series is higher at 24.83, compared to 22.62 per cent earlier, mainly due to higher food prices in the period considered. Similarly, share of fuel prices has moved lower to 11.24 per cent from 13.15 per cent, due to the lower crude oil prices in that period. Manufactured products continue to have the largest share at 63.93 per cent in the new index.

The recommendation of the working group on construction and dissemination of the Business Services Price Index (BSPI) should also be heeded. Merging this index with the WPI will help capture the inflation in services more accurately. The report suggests six price indices — BSPI-Banking, BSPI-Insurance, BSPI-Securities, BSPI-Telecom, BSPI-Air Transport and BSPI-Railways — as separate indices and a combined BSPI. This index can be used by National Accounts Division, MOSPI, as a deflator in national accounts.

Published on June 13, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor