India’s Shift From WPI To PPI
Source: Indian Express
GS II: Government policies and interventions for development of various sectors and issues arising out of their design and implementation.
Overview
- News in brief
- What is the Producer Price Index (PPI)?
Why in the News?
The Ministry of Commerce and Industry will release the new Wholesale Price Index (WPI) on June 15.
News in Brief
- The Ministry will release the new WPI series with 2022-2023 as the base year.
- This will be discontinued after a period of five years.
- The new Producer Price Index (PPI) will become the main measure of non-retail inflation.
What is the Producer Price Index (PPI)?
- Measures the average changes in prices received by domestic producers for their output.
- Major economies such as the US, China, Japan, Germany, France and the other G20 countries use PPI.
- Types include: output PPI, input PPI and services PPI.
Key Highlights:
- The output PPI will include 125 items in the beginning.
- Services PPI includes seven sectors initially: banking, railways, insurance, air transport, telecom services, securities transactions, and management of pension funds.
- Revised WPI basket expands from 697 to 957 items, which includes the new sources of energy such as solar and wind, added under the electricity group.
Limitations of Wholesale Price Index (WPI):
- Less alignment with the modern national accounting framework.
- WPI covers only goods and excludes services.
- Not suitable for an evolving service – oriented economy.
- Does not align with international standards and global best practices.
Advantages of Producer Price Index (PPI):
- More consistent with the national accounts framework and aligns with global best practices.
- PPI covers both goods and services.
- India adopted PPI based on the recommendations of the International Monetary Fund (IMF).
- Aligns with global best practices.
WPI and CPI
- The Wholesale Price Index (WPI) and Consumer Price Index (CPI) are the two major indices used to track price movements.
- WPI measures price movements in wholesale markets, whereas CPI tracks inflation at the retail level including certain services.
- CPI used by the Reserve Bank of India to decide interest rates.
- And WPI is used in price escalation clauses in the supply of raw materials, construction work and machinery.
- Currently, the Ministry of Statistics and Programme Implementation (MoSPI) uses the combination of WPI and CPI to adjust GDP in current prices to compute real GDP.
- Once the new index becomes stable, the new GDP is expected to use output PPI.
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