News Excerpt:
The Department for Promotion of Industry and Internal Trade (DPIIT) is in the final stages of developing a model for implementing the Producer Price Index in India.
More about the News:
- DPIIT has completed consultations with the Ministry of Statistics and Programme Implementation, which is a crucial step in the process.
- The next steps involve review by the National Statistical Commission and approval from higher authorities.
- While the model is ready from DPIIT's perspective, there's no specific timeline for implementation yet due to the need for various procedural clearances.
- The move towards PPI has been under consideration for about 20 years, with the idea first proposed in 2003. A working group was set up in 2014 to determine the methodology and data requirements, and their report came out in 2017.
What is the Producer Price Index?
- The Producer Price Index is a more comprehensive measure of wholesale prices than the currently used Wholesale Price Index (WPI).
- It looks at prices from the perspective of producers of goods and services, tracking price changes at various stages of production.
- This approach aligns with the internationally recognized System of National Accounts, making it easier to compare economic data across countries.
- PPI is considered more accurate and reflective of true economic conditions in the country.
Differences between PPI and WPI:
- PPI measures the average change in prices received by producers and excludes indirect taxes, while WPI captures price changes at the point of bulk transactions and may include some taxes and transportation costs.
- PPI removes the multiple counting bias inherent in WPI. Additionally, PPI includes services, while WPI only covers goods.
Reasons for Replacing WPI with PPI:
There are several limitations to the current WPI system:
- It often counts the same product multiple times, leading to a bias in the calculations.
- It doesn't account for exports and imports, missing a significant part of the economy.
- The service sector, which makes up about 55% of India's GDP, is not included in WPI. PPI addresses these issues, providing a more accurate picture of the economy. It's also better suited for calculating real GDP, as it's a more comprehensive deflator than WPI.
Transition Process:
- India is one of the few countries still using the Wholesale Price Index (WPI).
- The shift from WPI to PPI won't be immediate and there will be a transitional period where both indices will be calculated and published.
- It will allow for a smooth transition and give time for various stakeholders to adapt to the new system.
Challenges in Implementing PPI:
- Determining appropriate samples that accurately represent the economy.
- Assigning correct weightings to different goods and services.
- Deciding how often to collect price data (weekly, monthly, etc.).
- Identifying which services to include and how to measure them accurately.
Current Use of WPI:
- Despite its limitations, WPI remains widely used in India due to its long history and familiarity.
- It's a key measure of inflation and is used alongside the Consumer Price Index to calculate real GDP from nominal GDP.
- The continued use of WPI highlights the importance of a careful and well-planned transition to PPI
Base Year of WPI:
- Apart from the PPI implementation, the government is also looking at updating the base year for WPI, currently set at 2011-12.
- This update is necessary to reflect current economic realities.
- The government is considering whether to have a single base year for all indices or different base years for different types of indices, as some other countries do.
