TAG: GS 3: ECONOMY
THE CONTEXT: The Department for Promotion of Industry and Internal Trade (DPIIT) in India is nearing the finalization of a model to introduce a Producer Price Index (PPI), which may eventually replace the existing Wholesale Price Index (WPI).
EXPLANATION:
- This initiative aims to align with international standards and provide a more accurate measure of economic activity from the producers’ perspective.
The Producer Price Index (PPI)
- The PPI tracks wholesale prices at various stages of production, reflecting the perspective of producers of goods and services.
- Unlike the WPI, which primarily measures price changes at the wholesale level, PPI includes prices at different production stages, offering a more comprehensive view of price movements in the economy.
- This method is consistent with the internationally agreed System of National Accounts (SNA), which many countries have adopted.
- DPIIT has conducted consultations with the Ministry of Statistics and Programme Implementation (MoSPI) and sought advice from the International Monetary Fund (IMF) regarding the methodology for PPI.
- DPIIT Secretary mentioned that the model is final from their side and procedural clearances are underway.
- The National Statistical Commission (NSC) is also expected to review the model before it is presented to higher authorities.
- The eventual goal is to replace WPI with PPI, aligning India with most developed countries.
- However, there will be a transitional phase where both indices will co-exist.
- This transition aims to address any potential disruptions and ensure a smooth shift to the new index.
Rationale for Replacing WPI with PPI
- Limitations of WPI
- Inbuilt Bias: WPI suffers from the double counting of products, leading to inaccuracies.
- Exclusion of Exports and Imports: It does not account for export and import prices, missing a significant aspect of the economic landscape.
- Exclusion of the Service Sector: WPI excludes the service sector, which constitutes about 55% of India’s GDP.
- Inconsistency with International Standards: WPI is not fully aligned with international standards for economic measurement.
- Advantages of PPI
- Alignment with International Standards: PPI is conceptually in line with global practices and the SNA.
- Comprehensive Coverage: PPI includes prices at different production stages and covers the service sector.
- Better Deflator for Real GDP: PPI provides a more accurate measure for calculating real GDP compared to WPI.
Challenges in Implementing PPI
- The transition to PPI would take time due to challenges in preparing the right samples and assigning appropriate weightings to goods and services.
- Identifying representative services and determining their weightings are critical tasks that require careful consideration.
- Deciding the frequency of price collection, whether monthly or weekly, is another challenge.
- The periodicity must balance timely data collection with resource constraints.
Historical Context and Efforts
- The Indian government has been exploring the methodology for constructing PPI for over two decades.
- A report by a working group under the commerce and industry ministry in 2017, headed by economist B N Golder, emphasized the global shift from WPI to PPI since the 1970s to avoid the biases of WPI and achieve consistency with National Accounts Statistics (NAS).
Current Use of WPI and Future Updates
- Despite its limitations, WPI remains a widely followed measure of inflation in India, used alongside the Consumer Price Index (CPI) to calculate real GDP from nominal GDP.
- The government is also considering updating the base year for WPI from the current 2011-12.
- This update is part of broader efforts to ensure that statistical indicators remain relevant and accurate.
- DPIIT Secretary mentioned ongoing discussions regarding the base year for WPI and other statistical indicators.
- The government may adopt multiple base years for different indices, as seen in other countries, to enhance the accuracy and relevance of economic measurements.