The new wholesale price index (WPI) series with 2011-12 as base year, announced on Friday, departed from the established practice to scrap the indirect tax component from the price of goods to remove the impact of fiscal policy on inflation. The change signals India’s move towards the concept of producers’ price index to better gauge the actual price pressure in the economy at the wholesale level.
The removal of the duty component reflects the fact that WPI inflation, according to the new series, is much lower the level reported under the old series with 2004-05 as the base year — only 1.7% in 2016-17 against 3.7% reported earlier.
The move will also mean that when the goods and services tax (GST) is introduced from July, the WPI won’t reflect it, while consumer price inflation will continue to capture such tax component built into the retail price of goods and services. This could potentially result in a sudden bout of WPI-CPI divergence.
Since WPI is used in the deflator to estimate real growth in gross domestic product and gross value added (GVA), the lower WPI numbers from 2012-13 to 2016-17 on a new base could lead to upward revision of such growth data. Since WPI is used as a part of the deflator to calculate the real growth of GVA, removing such tax component from the WPI is integral to the fact that the GVA doesn’t factor in indirect taxes.
In a separate release, the government said CPI inflation hit a new low of 2.99% in April, against 3.96% in March, thanks to just a 0.61% rise in retail food inflation. Wholesale price inflation, too, eased to 3.85% in April, against 5.29% in the previous month, thanks to a moderation in food, fuel and manufactured items.
Chief statistician TCA Anant said: “Since the GST will be captured on the final point of sale, it will be reflected only in the CPI. So the GST will account for a certain degree of divergence between the new WPI data and the CPI data.”
While the number of items in the WPI basket has now been raised to 697 from 676 earlier, much lower than the expert committee’s suggestion, the number of quotations for gauging inflation will jump 52% to 8,331. Also, while 498 items have been retained from the earlier series with 2004-05 base year, 146 items with little relevance in the changing consumption pattern have been dropped and 199 new items have been added to make the latest index more representative of wholesale price inflation.
Also, the government will gauge the prices of seasonal fruits and vegetables for a much longer period, and not just during the season. A new WPI food index will also be launched, just like the one that tracks retail food inflation.
However, while the new WPI series will reflect more adequately the changing consumption pattern in the economy and better capture the price pressure at the producer/wholesale level, it may not necessarily narrow its huge divergence with the consumer price index-based inflation witnessed in recent years, partly due to the huge difference in the composition of the two price gauges.
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Commenting on the moderation in inflation in April, Aditi Nayar, principal economist at ICRA, said: “Despite the lower-than-expected inflation prints, the Monetary Policy Committee of the RBI may still choose to wait until the effects of the GST and HRA revision on inflation become clearer, and opt for a pause in the June 2017 policy review.”