By NR Bhanumurthy
India is preparing to move to a producer price index in the next few months, in addition to the extant consumer price index, and the wholesale price index may be on its way out. NR Bhanumurthy explains the rationale behind the move
l What is the government proposing?
THE GOVERNMENT LAST week announced that India will move towards having a producer price index (PPI) instead of the existing wholesale price index (WPI).
The Office of Economic Advisor within the Department of Promotion of Industry and Internal Trade (DPIIT), which is responsible for estimation of the PPI, suggests that the government is ready with a suitable PPI estimation framework and it needs to be processed through the National Statistical Commission and other regulatory bodies before it is officially launched.
l What is the producer price index?
AT THE ECONOMY level, there are various price indices that are estimated to understand the price changes from the base year. The PPI is one such indicator that measures the average changes in prices that producers receive for their goods and services produced and are captured at the factory gate or at the service provider site. This excludes the taxes, transport, trade margins and other charges that are imposed when those products reach consumers or as inputs to other producers. In other words, it is the suppliers’ price.
l Other price measures in India
There are two main measures: consumer price index (CPI) and wholesale price index (WPI). While the CPI measures the prices changes at the retail market or at the final consumption level, the WPI measures the price changes at the wholesale market. Conceptually, the WPI estimate is in-between the PPI and the CPI, i.e., when goods and services move from producers to consumers.
There is also the GDP deflator, which is broadly a combination of the WPI and the CPI, and is an outcome of the adjustments between expenditure (nominal) side and value-added (real) estimates of national accounts.
l Issues with CPI and WPI estimates
INDIA’S MONETARY POLICY, under the flexible inflation targeting regime, has shifted its focus from the WPI to the CPI. Since then the policy content in the WPI has been limited. Recent trends show that the two indices have been diverging — while CPI inflation was at over 7%, WPI inflation was suggesting a negative trajectory. Conceptually, the prices in both wholesale markets and retail markets need to be co-integrated. But in India, only divergence is noted between the two, especially in the last three years. This suggest that one of the two measures is not consistent. As the WPI does not cover a large part of the GDP, it may not represent the wholesale market price pressures. Thus, the need for a new measure that is stable, comparable and representative of price pressures at the production place. Indeed, the present WPI estimates are the root cause of the narrowing gap between real and nominal GDP growth rates in India and relying on the WPI would only accentuate the national income estimates.
l The need to move from WPI to PPI
MOST COUNTRIES, ESPECIALLY advanced economies, moved to the PPI in the 1970s as this suggests the price pressures at the production level and does not include the taxes that are generally quite uneven between and within the country. For instance, differences in GST rates for petroleum products and alcohol at the state level in India could result in different prices if one estimates WPI even though the production prices remain same. At present, the WPI does not cover prices of services despite the fact that services account for nearly 60% in the overall GDP, thus suggesting a limited use of WPI for both monetary policy and also for estimating economy-wide deflator. Further, conceptually, WPI is not consistent with the System of National Accounts framework that is used for estimating national accounts world over.
l Indices used for public policy
INFLATION ESTIMATES ARE very important indicators for macro policy making, especially for monetary policy and labour market policies. In India, since 2016, CPI inflation is used as a target variable by the monetary authority and it needs to ensure it is between 2% and 6%. However, for provisioning dearness allowance, India follows CPI (Industrial Workers) data. The WPI is not used for any policy purpose except for estimation of volumes for a few items in the national accounts. Since the WPI has limited coverage, it is resulting in narrowing of real and nominal GDP growth rates. For 2022-23, for which final estimates are available, real and nominal growth rates of GDP at market price narrow at 8.2% and 9.6%, respectively, with a deflator growth of about 1.5% while the average CPI inflation was over 5%. Hence, there is a need for a PPI that covers broader economic activities to represent economy-wide price pressures.
The writer is professor, NIPFP
