India to get another index to record price movement

NEW DELHI: India will have another gauge of price changes, the producer price index ( PPI), completing the bouquet of indices needed for a holistic picture of inflation in the economy.

The ministry of industry has set up an internal committee to prepare a framework for the new index . The committee has commissioned studies to arrive at a commodity basket for the PPI. The process could take a couple of years despite a reasonably good wholesale price index (WPI), considered a proxy to the PPI.

“The producer price index would help us in looking at the margins,” said C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council.

The PPI measures changes in prices received by domestic producers of goods and services over time. This is different from the retail price paid by consumers that include logistics costs, taxes and other levies. It will give an account of the economy’s efficiency in transferring goods and services from the producer to the consumer, who could be the final consumer or another producer using it as an input.

“We will roll out the PPI with the next series of wholesale price index,” said a senior official with the industry ministry.

India has five gauges of inflation, measuring prices from the wholesale level to the retail level. The WPI is the most widely followed index for inflation and there are four consumer price indices. The WPI measures prices recorded in bulk transactions , while the consumer price indices measure prices paid by the consumer. The current WPI series was launched in September this year with 2004-05 as the base year.

A report of the working group set up to revise the WPI series to a new base said that once the price data between basic price and excise duties/subsidies at the wholesale level was available, then the calculation of the PPI should not be difficult.

The WPI would typically have some taxes such as excise levies and logistics costs already bundled in and would not necessarily be the price received by the producer. Once the PPI is in place, there would not be any need for the WPI.

The working group report further said the WPI could eventually be discontinued. The US had converted its wholesale price index into a producer price index in 1978.

The working group had also favoured that integration of services in a comprehensive inflation measure be done with the PPI rather than the WPI.

PRICE GAUGE

How are prices measured in India?
Prices are measured at wholesale and retail levels

What is the global best practice?
Most advanced economies have a producer price index and a set of retail price indices

What is producer price index, or PPI?
It is a measure of change over time in the selling price for producers. It is usually the first commercial transaction in goods and services produced

How does PPI differ from WPI?
WPI measures prices at the wholesale level and includes certain taxes and costs. PPI is a measure of what the producer gets and not what buyer pays, which includes taxes

Why is a PPI needed?
Together with the retail price indices, it gives an idea of margins on different products and incidence of taxes. It indicates the cost pressures in an economy