Key achievements of Department of Economic Affairs: Improvement in India’s Macroeconomic Stability , Ministry of Finance Click here

Wholesale Price Index (WPI)

From Arthapedia
Jump to: navigation, search

Wholesale Price Index (WPI) measures the average change in the prices of commodities for bulk sale at the level of early stage of transactions. The index basket of the WPI covers commodities falling under the three major groups namely Primary Articles, Fuel and Power and Manufactured products. (The index basket of the present 2011-12 series has a total of 697 items including 117 items for Primary Articles, 16 items for Fuel & Power and 564 items for Manufactured Products.) The prices tracked are ex- factory price for manufactured products, mandi price for agricultural commodities and ex-mines prices for minerals. Weights given to each commodity covered in the WPI basket is based on the value of production adjusted for net imports. WPI basket does not cover services.

In India WPI is also known as the headline inflation rate .

In India, Office of Economic Advisor (OEA), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry calculates the WPI.

The main uses of WPI are the following:

  1. to provide estimates of inflation at the wholesale transaction level for the economy as a whole. This helps in timely intervention by the Government to check inflation in particular, in essential commodities, before the price increase spill over to retail prices.

  2. WPI is used as deflator for many sectors of the economy including for estimating GDP by Central Statistical Organisation (CSO).

  3. WPI is also used for indexation by users in business contracts.

  4. Global investors also track WPI as one of the key macro indicators for their investment decisions.

The Government periodically reviews and revises the base year of the WPI as a regular exercise to capture structural changes in the economy and improve the quality, coverage and representativeness of the indices. The Wholesale Price Index (WPI) series in India has undergone six revisions in 1952-53, 1961-62, 1970-71, 1981-82, 1993-94 and 2004-05 so far. The base year of All-India WPI has been revised from 2004-05 to 2011-12 on 12 May 2017 to align it with the base year of other macroeconomic indicators like the Gross Domestic Product (GDP) and Index of Industrial Production (IIP). The current series is the seventh revision.

The revision entails not just shifting the base year to 2011-12 from 2004-05, but also changing the basket of commodities and assigning new weights to the commodities.

The new series with base 2011-12=100, was based on the recommendations of the Working Group which was constituted on 19th March 2012 under the chairmanship of Late Dr. Saumitra Chaudhuri, Member, erstwhile Planning Commission. The committee submitted its report in March 2014.

Wholesale price index calculated with 2011-12 base year does not include taxes in order to remove the impact of fiscal policy. This also brings the present WPI series closer to Producer Price Index, as is practised globally. A Producer Price Index reflects the change in average prices that producers get. The exclusion of indirect taxes would also ensure the continuity and compatibility of new WPI series as and when Goods and Services Tax (GST) is introduced.WPI is used as a deflator for nominal macroeconomic aggregates like GDP and IIP. Since the nominal estimates are computed at basic price which does not include product taxes, excluding indirect taxes from WPI makes it a compatible and appropriate deflator.

 

Wholesale Price Index (WPI) Vs Consumer Price Index (CPI)

WPI reflects the change in average prices for bulk sale of commodities at the first stage of transaction while CPI reflects the average change in prices at retail level paid by the consumer.

The prices used for compilation of WPI are collected at ex-factory level for manufactured products, at ex-mine level for mineral products and mandi level for agricultural products. In contrast, retail prices applicable to consumers and collected from various markets are used to compile CPI.

The reasons for the divergence between the two indices can also be partly attributed to the difference in the weight of food group in the two baskets. CPI Food group has a weight of 39.1 per cent as compared to the combined weight of 24.4 per cent (Food articles and Manufactured Food products) in WPI basket.

The CPI basket consists of services like housing, education, medical care, recreation etc. which are not part of WPI basket. A significant proportion of WPI item basket represents manufacturing inputs and intermediate goods like minerals, basic metals, machinery etc. whose prices are influenced by global factors but these are not directly consumed by the households and are not part of the CPI item basket.

Thus even significant price movements in items included in WPI basket need not necessarily translate into movements in CPI in the short run. The rise or fall in prices at wholesale level spill over to the retail level after a lag.

Similarly, the movement in prices of non-tradable items included in the CPI basket widens the gap between WPI and CPI movements. The relative price trends of tradable vis a vis non-tradable is an important explanatory factor for divergence in the two indices in the short term.

 

Key Highlights of WPI with 2011-12 as base year

In the new and presently running WPI series, significant improvement in concept, coverage and methodology has been made . In the updated WPI basket, the number of items has been increased from 676 to 697. In all 199 new items have been added and 146 old items have been dropped . Efforts have been made to enhance the number of quotations from 5482 to 8331, an increase by 2849 quotations (52%) . The increase in number of quotations has been done across the major groups to ensure comprehensive coverage and representativeness. New definition of wholesale price index does not include taxes in order to remove impact of fiscal policy. This also brings new WPI series closer to Producer Price Index and is in consonance with the global practices. The item level indices are being compiled based on statistically robust Geometric mean as compared to Arithmetic mean used in the WPI 2004-05 series. (The formula geometric mean is used for calculation of elementary indices by CSO in its CPI series. Prior to independence, the WPI was computed using Geometric Mean. The weighted arithmetic mean was adopted in preference to weighted geometric mean since independence, due to increase in number of commodities and consequent computational complexities.) Further for the first time a Technical Review Committee has been set up to recommend appropriate methodological intervention to continuously improve coverage, quality and timeliness of the WPI. The new series also present separate ‘WPI Food Index’ which along with CPI Food Price Index published by CSO would help monitor the food inflation effectively. Further, seasonality of fruits and vegetables has been updated to account for more months as these are now available for longer duration. (For example, tomato price index will now be available around the year as against eight months in the current series of WPI (base 2004-05). Cauliflower was earlier available only for six months but now it will be available for eight month in the year.)

The major changes in weights, number of items and quotations between WPI 2004-05 and WPI 2011-12 are given in the table below:

Major Group

Weights

No. of Items

No. of Quotations

 

2004-05

2011-12

2004-05

2011-12

2004-05

2011-12

ALL COMMODITIES

100.00

100.00

676

697

5482

8331

PRIMARY ARTICLES

20.12

22.62

102

117

579

983

FUEL & POWER

14.91

13.15

19

16

72

442

MANUFACTURED PRODUCTS

64.97

64.23

555

564

4831

6906


The inflation for “All Commodities” in the new series of WPI (2011-12) is, in general, lower than 2004-05 series due to shift to latest base year. The minor variation in rate of inflation estimates can be attributed to the changes in weighting structure, increase in number of quotations, inclusion of new items and exclusion of obsolete items, exclusion of indirect taxes and use of geometric mean instead of arithmetic mean in the new series.

 

Changes in Commodity basket under WPI (2011-12 =100)

In the revised WPI basket, total of 199 new items have been added and 146 items have been deleted. In all 498 items are common between the 2004 -05 and 2011-12 series.

 

Primary Articles

In the Primary Articles, new vegetables and fruits such as Radish, Carrot, Cucumber, Bitter Gourd, Mosambi, Pomegranate, Jack Fruit, Pear etc have been added. In the mineral group items like Copper Concentrate, Lead Concentrate and Garnet have been added whereas Copper Ore, Gypsum, Kaolin, Dolomite, Magnesite have been deleted. Natural Gas has been added as a new item.

 

Fuel and Power

In the Fuel and Power Major Group, the index for non-coking coal will also be available at a disaggregated level based on Gross Calorific Value ( GCV) to cater to the requirements of diverse user groups:

• Non-Coking Coal G1 to G6 [GCV > 5500 Kcal/kg.]

• Non-Coking Coal G7 to G14 [GCV 3100 Kcal/kg to 5500 Kcal/kg]

• Non-Coking Coal G15 to G17 [GCV < 3100 Kcal/kg.]

The item coke has been dropped.

The electricity sector is now a single item group that includes data relating to average rate of sale of power by generating stations to distributors. In contrast, in WPI (Base 2004-05) retail level tariffs applicable to different sectors such as agriculture, industry, domestic, commercial and railways were used for compilation of WPI for electricity. In the new series, monthly average rate of sale of power of 49 selected generating stations covering Hydro and Thermal sectors is being used to compile the index for electricity.

In the Mineral oil sub-group, Light Diesel Oil has been deleted in view of its decreasing importance while Petroleum coke has been added as a new item owing to its growing importance. There have been some changes in weights of the retained mineral fuels. The number of quotations has been increased significantly to give wider geographical coverage.

Also the number of quotations for Fuel & Power has increased from 72 in WPI (2004-05) to 442 in WPI (2011-12) as per the details given below:

Coal: In new series, pithead run of mine notified prices for both regulated and unregulated sectors from all mines and for all grades is being used. This change has increased the number of quotations for coal from 20 in current series to 127 in new series.

Electricity: There is a change in the definition of prices for computation of price index for electricity from considering use based retail prices in the WPI (2004-05) to using average rate of sale of power of selected generating stations in the new series WPI (2011-12). There is a substantial increase in number of quotations from 5 in 2004-05 series to 49 in new series covering Hydro, Thermal (coal and gas) based plants.

Mineral Oil: Number of quotations under mineral oil has increased from 47 in current series to 266 in new series due to increased coverage of refineries and varieties.

 

Manufactured Products

A major review of manufactured products has been carried out. Accordingly, the number of 2 digit groups has been increased from 12 to 22 in the new series in keeping with National Industrial Classification (NIC) of 2008. Around 173 new items like Conveyer Belt, Rubber Tread, Steel Cables, Tissue Paper, Wooden Splint, XLPE Compound have been added while 135 items like Khandsari, Papad, Video CD-Players, etc., have been dropped.

 

Assigning weights to commodities constituting WPI

The weight of an item in the WPI basket is based on the net traded value of the item in the base year i.e. 2011-12. The net traded value is the value of output of the item in the year 2011-12 adjusted for net imports. Thus, net traded value represents the total transactions of each product in the economy during the base year. However the weight assigned to crude petroleum is based on the value of domestic production only as crude petroleum is not directly traded in the market and its derivatives ( petroleum products ) are assigned due weight based on net traded value.

Weights can change from series to series depending on addition /deletion of items or regrouping of commodities etc. Some real examples are given below.

The weight of the Primary Article has increased from 20.1 % in WPI (2004-05) to 22.6% in WPI (2011-12). This increase is primarily attributed to the increase in the weight of “Crude Petroleum” from 0.90% in 2004-05 series to 1.94% in 2011-12 series and addition of one new item “Natural gas” with 0.46% weight. It may be noted that the average price of crude oil (Indian basket) was at peak in 2011-12.

In the 2004-05 series, Manufacture of textiles had a weight of 7.33%. This has now been bifurcated into 2 sub-groups in 2011-12 namely Manufacture of Textiles and Manufacture of Wearing Apparel. The combined weight of these groups is 5.69% in 2011-12 series. The decrease in this Group’s weight is due to some items which were earlier classified under textile such as polyster staple fibre, viscose staple fibre, viscose staple fibre and acrylic fibre have now been put under the chemical group given their widespread applicability, not restricted to textile sector.

Weights of major groups in WPI may also be at variance with their share in GDP. This is because the Wholesale Price Index (WPI) is an index covering prices of products/commodities only pertaining to four sectors comprising agriculture, mining, manufacturing and electricity. The other sectors of GDP, in particular, services sector are not covered under WPI. The share of these four sectors in GDP at current prices in 2011-12 was 41.4%. The weighting diagram of WPI is not drawn on the basis of gross value added which is a concept in GDP. The weights are derived on the basis of turnover or value of output adjusted for net imports. The ratio of gross value added to value of output differs significantly in the sectors covered under WPI.

 

Technical Review Committee

Economies undergo structural changes over time. Products and their specification both in terms of quality and technology are changing even faster. This makes it increasingly difficult to obtain the price information of selected products for a fixed number of quotations over a longer period of time. Further an implicit disadvantage of [#Laspeyres Laspeyre’s formula ] used for compiling the WPI is that the indices with fixed weighting diagram fail to capture the dynamic changes in product mix and structure of the economy over time. In order to address important technical issues such as substitution of source of data, change in specification of products and other data/methodological issues which require continuous process of review on a dynamic basis so that the new WPI series remains relevant over the next few years, an institutional mechanism has been established through creation of Technical Review Committee (TRC) chaired by Secretary, Department of Industrial Policy & Promotion.

This committee will meet at least once a year for inter-alia recommending methodology for improving the coverage and quality of WPI like identifying new items that need to be included in the item basket and removing those that have lost its relevance or are no longer being produced.

The terms of reference of the TRC are:

  1. Reviewing periodically the list of products in the item basket of WPI and suggesting methodology for inclusion of new important items in and exclusion of outdated items from the existing basket as and when warranted.

  2. Reviewing periodically the panel of factories for compilation of WPI and suggest methodology for including new representative units that emerged after the roll out of the series in the existing panel, along with suggesting adjustment of the back series.

  3. The Committee will also consider cases of closed units during the currency of the base year and recommend the methodology for replacing such units by new ones.

  4. Reviewing periodically the items in the item basket that exhibit extraordinarily high increase/ decline in index during the currency of a fixed base year and propose normalization methodology.

  5. Suggest methodology for adjusting prices of items with frequently changing specification.

  6. Recommending appropriate methodological intervention to improve coverage, quality and timeliness of the WPI

 

Linking Factor

In view of the conceptual and methodological difference between the 2004-05 and 2011-12 series, the estimate of linking factor will vary depending on the type of method used. Therefore, users are free to choose any method as may be considered appropriate by them. However, as in the past, in order to maintain continuity in the time series data on wholesale price index, the linking factor using the arithmetic conversion method for All Commodities and the three major groups of WPI are given in the Table below.

 

WPI (Base2004-05) for 2011-12

Linking Factor

All Commodities

156.1

1.561

Primary articles

200.3

2.003

Fuel & Power

169.0

1.690

Manufactured Products

139.5

1.395


Monthly index numbers based on new WPI series from April 2012 onwards are available at the website of Office of Economic Adviser .


Impact of the Revision in base year

WPI is used as the main deflator in estimating many macro-economic variables including for deflating the core ingredients in the annual and quarterly national accounts and forecasts of GDP. The impact of revision in WPI would thus get reflected in all those variables which uses WPI as a deflator.

For instance, when WPI is lower, as is the case with the revision to 2011-12 series, real gross value added (GVA) would increase, thereby showing an increase in GDP. The downward revision in WPI may enhance the divergence with consumer price index.

Some of these issues are clarified in detail by the Chief Economic Advisor, Dr. Arvind Subramanian in his article in Live Mint on 25 May 2017.


Also See


References

website of Office of Economic Adviser .

Press Release of Office of Economic Adviser dated 12 May 2017


Contributed by

Mr. Anupam Mitra (IES 2003)
Email: anupam.mitra@gov.in

Personal tools
Variants
Actions
Navigation
Concepts
Share Tools
Toolbox
Translate