In News:

The Government of India has formed an 18-member panel, headed by Ramesh Chand, a member of NITI Aayog, to revise the base year of the Wholesale Price Index (WPI) to 2022-23 from the current base year of 2011-12. The panel will also work on a roadmap for transitioning from WPI to the Producer Price Index (PPI).

Key Highlights:

Role and Mandates of the Panel:

• Revised Commodity Basket: The panel will recommend a new commodity basket for both WPI and PPI, reflecting structural changes in the economy.
• Review of Price Collection System: The panel will evaluate the current system for price collection and propose improvements.
• Computational Methodology: It will determine the computational methodology for both WPI and PPI to ensure accuracy in tracking price changes.
• The panel has been tasked with submitting its final report to the Office of the Economic Adviser at the Department for Promotion of Industry and Internal Trade (DPIT) within 18 months.

Understanding WPI vs. PPI:

• WPI (Wholesale Price Index) tracks the price of goods at the wholesale stage (i.e., goods sold in bulk to businesses), and excludes the service sector.
  • Key Characteristics of WPI:
    • Does not consider consumer-facing prices.
    • Excludes services (about 55% of GDP).
    • Can have double-counting bias due to multiple transactions before the final sale.
    • Does not account for indirect taxes and may include export/import prices.
  • Use: WPI helps in tracking bulk price movements between businesses, but doesn't fully represent consumer price inflation.
• PPI (Producer Price Index) tracks prices at various stages of production, considering both goods and services, and measures the average change in prices received by domestic producers.
  • Key Characteristics of PPI:
    • Excludes indirect taxes (making it more accurate for price movement tracking).
    • Includes services, unlike WPI, giving a broader view of price trends across the economy.
    • More aligned with international standards (System of National Accounts).
    • Reflects prices before consumer consumption, providing a business-oriented perspective of price trends.

Why the Transition to PPI?

• The PPI is already used by major economies like the US, China, Germany, and Japan as it provides a more comprehensive measure of inflation from a producer’s perspective.
• It is expected to be a better indicator of inflationary trends in the overall economy, including both goods and services.

Challenges and Roadmap:

• The switch to PPI is complex, and the panel will need to ensure that the transition does not disrupt the current data collection and reporting systems. Both WPI and PPI will run concurrently until PPI stabilizes.