Govt to replace WPI with Producer Price Index

• The government has decided to phase out the Wholesale Price Index (WPI) and introduce Producer Price Index (PPI).

• The government has also revised the base year of WPI to 2022-23 from the existing 2011-12.

• The Office of Economic Adviser, under the Department for Promotion of Industry and Internal Trade (DPIIT), will accordingly release the revised series of WPI with the new base year on June 15, which would replace the existing series with base year 2011-12.

• In addition, a new series of Output Producer Price Index (OPPI), Trial Input Producer Price Index (IPPI), and Service Producer Price Index (Service PPI) of seven services — Banking, Securities Transaction, Insurance, Management of Pension Funds, Railways, Air (Passenger), and Telecom with base year 2022-23 will also be released.

• Earlier, the recommended compilation methodology was approved by the Technical Advisory Committee (TAC) on Statistics of Price and Cost of Living (SPCL).

• Subsequently, the methodology was also presented before the National Statistical Commission (NSC).

What is Wholesale Price Index (WPI)?

• The Office of the Economic Adviser (OEA) is responsible for the compilation and publication of the Wholesale Price Index (WPI) every month. 

• The WPI tracks the changes in the prices of goods that are traded in bulk between businesses. It focuses solely on goods (not services) and reflects the dynamics of supply and demand in sectors like industry, manufacturing, and construction.

• The month-over-month increase in the WPI is used to measure the level of wholesale inflation in the economy.

• WPI is primarily used as deflator in National Accounts Statistics and in escalation clauses of financial contracts. 

• It is also widely used for price adjustments in the procurement of raw material, plant and machinery, construction, infrastructure projects, toll rates, essential drugs, and deciding tariffs for major ports and electricity, etc.

Panel for revision

• Office of Economic Adviser (OEA), Department for Promotion of Industry and Internal Trade (DPIIT) constituted a Working Group for the revision of current series of WPI (Base 2011-12) under the chairmanship of Ramesh Chand. 

• The Working Group constituted five sub-groups for having detailed deliberations on sector-specific issues and methodological aspects of the indices. 

• With the extensive process of consultation with stakeholders, including different ministries, industry associations, financial institutions, regulators and discussion held with the members of sub-groups and Working Group, the methodologies for the revised series of WPI and new series of PPIs have been finalised.

• The total number of items has increased from 697 to 957.

• New sources of energy, such as solar and wind, have been added under ‘electricity’ group. In addition, nuclear electricity has been included in the basket.

• Crude petroleum and natural gas has been shifted from the ‘primary articles’ to ‘fuel and power. This reorganisation would lead to better alignment, as this group already houses other major fuels such as coal, electricity, and petroleum products.

Major components of WPI:

1) Primary Articles (22.76 per cent)

• It includes food articles, non-food articles, and minerals.

2) Fuel & Power (14.11 per cent)

• It includes coal, mineral oils, electricity, crude petroleum & natural gas.

3) Manufactured Goods (63.13 per cent)

• It includes textiles, apparel, paper, chemicals, cement, metals, etc and food products.

Transition from WPI to PPI

• Considering the wide usage of WPI in price escalation clauses, this index will be released for five years from the date of release of the revised series along with PPI and will be discontinued thereafter. This would give sufficient time to users to switch from WPI to PPI. 

• The transition from WPI to PPI is in alignment with the global best practices adopted by advanced economies and the recommendations of the International Monetary Fund (IMF). 

• PPI is a set of price indices: Output PPI and Input PPI. 

• Availability of both the Output PPI and Input PPI gives a better understanding of the price movements of output items in comparison with inputs items being used in an industry. 

• It also explains how inflation experienced by producers on input items is  passed through the output being produced. 

• In addition, availability of both the price indices enables carrying out ‘double deflation’ in estimating the Real GDP. 

• Unlike WPI, the PPI offers a more accurate measure of price changes from the producers’ perspective, thereby enhancing its suitability for use in national accounts compilation.

(The author is a trainer for Civil Services aspirants.)