By DK Srivastava, Chief Policy Advisor, EY IndiaConventionally, in India, two major price indices namely Wholesale Price Index (WPI) and Consumer Price Index (CPI) have been prepared periodically. The WPI is prepared by the Office of The Economic Adviser, attached to the Ministry of Commerce and Industry whereas the CPI is prepared by the Ministry of Statistics and Programme Implementation. It is the Office of the Economic Advisor which will also compile the Producer Price Index (PPI). The first release of PPI is with respect to the base year of 2022-23 which also is the base year for the latest WPI series. The wholesale stage is different from the production stage in the process of generation of value added. After the production stage, wholesale margins are added along with any input taxes that may already be included in the input costs. Thus, WPI does not reflect the prices pertaining purely to the production processes that are basically technological relations. PPI captures the prices relevant for the production process without being complicated by inclusion of indirect taxes net of subsidies or wholesalers’ margins. Additional taxes and margins are added on to the WPI to reach the CPI which is reflective of the movement of prices actually faced by consumers or retail users. Both WPI and CPI have undergone periodic changes in the base year and other important methodological changes with respect to coverage of commodities, methodologies for estimating missing data and methods for compilation of data.
Why is India introducing PPIs?
WPI suffers from two major shortcomings namely (1) it does not properly reflect the price movements at the production stage since some indirect taxes and margins get added to it; (2) it does not capture movement of prices related to services. As the economy has become more complex and the share of services in overall output has increased, there is a need to also capture movement in service prices. WPI is presently being used by businesses, government agencies, and contracting authorities owing to its close linkage with input costs, tradable goods prices, energy prices, and supply-side shocks, making it suitable for indexation, cost escalation, and contract pricing where adjustments are driven by wholesale level price movements rather than consumer prices. Indexation to WPI directly affects projected cash flows, tariff revisions, valuation outcomes, and risk allocation between contracting parties. For taking care of existing contractual obligations compilation of WPI may be continued for another five years. This would allow a transition from WPI to PPI in the relevant contractual arrangements.
Composition of PPI
The PPI consists of three alternative price measures being referred to as(1) Output Producer Price Index (OPPI),(2) Input Producer Price Index (IPPI) and(3) Service Producer Price Index (SPPI). The OPPI measures prices received by producers on their outputs and IPPI measures prices paid by producers on their inputs pertaining to goods. IPPI, which presently covers only the manufacturing sector, is being prepared on a trial basis. The endeavour is not to include any indirect taxes or profit margins in these prices although production subsidies are to be included. In addition, the SPPI would similarly reflect prices received by producers of services. Initially, SPPI was compiled to cover seven major services relating to banking, securities transaction, insurance, management of pension funds, railways, air passenger services, and telecom.
WPI vs PPI: Key differences
Weight structure of PPI
PPI is expected to better reflect production cost conditions including sectoral cost differences. The capture of production structure under PPI is wider as compared to WPI and the weight structures are also different. In the case of WPI, for the 2022-23 base year, the major segments along with their weights are:(1) Primary articles (22.76%), (2) Fuel and Power (14.11%) and; (3) Manufactured items (63.13%). In the context of preparing the PPI, Input-Output Tables (IoTs) have been extensively used since the idea is to capture technological dependence of outputs on inputs. For OPPI (goods) and IPPI (goods) weights have been computed using Supply and Use tables (SUT) of 2022-23. For computing weights of OPPI, total supply (output) at basic prices vector from the ‘Supply Table’ has been used, while for IPPI, inter-industry consumption or intermediate consumption (IC) matrix from the ‘Use Table’ has been used. At item level, the weights have been computed by splitting SUT commodities weights to different items using their respective value of outputs and inputs. Accordingly, the following broad sectoral weight structure has been used for OPPI: Agriculture, forestry and fishing (22.16%), Mining and quarrying (3.42%), Manufacturing (69.93%) and Electricity (4.49%).
Policy implications
With the availability of the PPIs, policymakers can better understand the source of inflationary pressures as to whether they are arising from raw materials or intermediate goods or services. The PPIs also help in better incorporating the ‘double deflator’ method in the compilation of national accounts since a distinction is being made between output prices and input prices. This gives a better idea of real output growth which is derived from nominal output growth. The PPIs would make the Indian statistical system better aligned to the international statistical practices and make Indian data internationally more acceptable and comparable. The availability of service PPI will make tracking of price behaviour more comprehensive since services are an important part of the production process. Over time, expanded coverage and improved methodological framework will add to policy credibility. PPI and CPI together will provide a more comprehensive guidance to policymakers. While the CPI will continue to be the policy anchor for the Monetary Policy Committee of the RBI, PPI would provide detailed inflation diagnostics.
Comparing WPI and PPI inflation
At present, the data released for WPI and OPPI under the new 2022-23 base covers the period from April 2023 to May 2026. Although the data is available on a monthly basis, if we make a comparison of quarterly inflation, it is observed that except for two quarters, OPPI inflation is slightly higher than WPI inflation. On the other hand, if a comparison is made between WPI and OPPI for manufactured products, the OPPI inflation for eight quarters covering 1Q 2024-25 to 4Q 2025-26 is slightly lower than the corresponding WPI inflation. PPI should be considered as providing a more comprehensive framework for understanding cost and price movements in the economy. Together PPI in its alternate versions and CPI will provide better guidance to different stakeholders in the economy and policymakers as to the cost and price movements of various inputs and outputs. The addition of services in the PPI framework would provide valuable information in tracking sources of inflation in the economy. The work relating to the PPI should be considered as evolving and over time the PPI data will become progressively more robust, backed by sound methodology. Indian data frameworks are quite reliable, and their international comparability will improve with these steps. We may look forward to more frequent changes in the base year with regular periodicity so that the dynamics of fast changing production processes in the context of evolving technologies are better captured. (*Tarrung Kapur, Senior Manager, Tax and Economic Policy Group, EY India also contributed to the article. Views expressed are personal.)