Producer Price Index

(Prelims: Indian Economy)
(Mains, General Studies Paper-3: Topics Related to Economic Development)   

  • The Department for Promotion of Industry and Internal Trade (DPIIT) has finalised a new model of Producer Price Index (PPI) to efficiently measure input prices in the economy and shared it with the International Monetary Fund (IMF).
  • The government is also working towards changing the base year of the Wholesale Price Index (WPI) as well as moving from WPI to PPI in line with most G-20 economies. 

What is Wholesale Price Index

  • The Wholesale Price Index (WPI) measures the change in the total price of goods before retail sales.
    • WPI shows the price of the commodity at the wholesale level. It includes goods sold in bulk, which are traded between organizations rather than consumers.
  • WPI It is the only common index that comprehensively measures price fluctuations and reflects changes in the prices of goods across all types of trade and transactions.
    • It is often considered as an indicator of the rate of inflation in the economy.

Calculation of WPI

  • WPI is reported on a monthly basis to track the overall rate of change in producer and wholesale prices.
  • The total cost of goods considered in a year is compared with the total cost of the same goods in the base year.
  • This index is set at 100 for the base period and the change in prices for the calculation year is expressed as a percentage. 

WPI in India

  • The Wholesale Price Index in India is calculated by the Ministry of Commerce and Industry.
  • The base year for the current series of WPI is 2011-12. This WPI It was the seventh revision of the WPI and was implemented from 2017. 

Major components of WPI

  • Primary goods (weightage 22.62%): It includes food items (cereals, fruits and vegetables), non-food articles and petroleum products (crude petroleum and natural gas).
  • Fuel and electricity (weightage 13.15%): It measures the fluctuations in the prices of petrol, diesel and LPG.
  • Manufactured products (weightage 64.23%): It includes manufacture of basic metals, food products, textiles, chemicals and chemical products, fabricated metal products etc.
    • Food Index: It is a sub-index under WPI, which includes 'food items' from the primary goods group and 'food products' from the manufactured products group. 

Criticism of WPI

  • It is an easy and convenient way to calculate inflation. WPI Changes in PPI also affect fiscal and monetary policies.
  • It does not include inflation at the level of the general public because they do not buy products at wholesale prices. It does not include the service sector in its calculation. 

What is Producer Price Index

  • The Producer Price Index (PPI) measures the average change over time in the prices received by domestic producers for their output.
  • It is calculated in two ways: when the manufactured goods go for sale or when the raw material enters the production process.
    • In a case where the finished goods leave the production site, it is known as output PPI.
    • Similarly, input PPI is when the goods enter the production process.
  • It considers inflation from the perspective of industry and trade and measures price changes before the final goods and services are purchased by consumers.
  • It is used by most developed countries. India is considering replacing WPI with PPI.
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