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Producer Price Index: Improving the System of Inflation Measurement in India

Producer Price Index India

Before Prime Minister Narendra Modi came to power in 2014, India was witnessing a double-digit inflation era. The retail inflation under UPA II (averaging 10% during 2009-14) had reached as high as 11.16% in November 2013 increasing the burden on the middle and poor class in India. Since then, the Modi government has not only relentlessly worked to reduce the inflation (averaging 4.6% during 2014-19) but also moved towards bringing systematic changes to how inflation is measured in India.

One such systematic change is the introduction of Producer Price Index in India. The Producer Price Index (PPI) measures the change in average prices that a producer receives or in other words, the average change in the price of goods and services at the place of production before they reach the market.

This is one of the methods of tracking price changes like Wholesale Price Index (WPI) or Consumer Price Index (CPI). India currently uses WPI and CPI to track the price movements in India or to gauge the level of inflation in the economy. However, to comply with international practices, the Modi government in 2014 had set up a panel under Professor B. N. Goldar to devise the new PPI which can replace the WPI. The WPI is unique to India and has its own set of problems as discussed below.

Difference between WPI and PPI

WPI measures the price changes at the wholesale transaction level which also includes indirect taxes. There are multiple counting biases inherent in WPI. Most importantly, WPI doesn’t include the services sector which contributes about 60 percent to India’s GDP.

However, PPI measures the price changes at the factory gate or at the exit gate of the place of production. So, it excludes tax components. It does away with multiple counting biases and importantly, it tracks price changes in both goods and services sector. Thus, it gives a clear picture of inflation in the economy.

Difference between PPI and CPI

CPI measures the price changes at the retail level paid by the consumers whereas PPI as explained above measures the change in the prices at the producer level. There is a difference between the price received by the producer from the price paid by the consumer due to taxes and logistics cost etc.

Once, both PPI and CPI are properly tracking the price changes, the estimation of inflation in the country will improve.

Current Status of PPI in India

The government had planned to use PPI parallel to WPI in the beginning and slowly replacing WPI by PPI.

In the year 2017, the new WPI series with 2011-12 as the base year was announced. This new WPI series didn’t take into account the tax component while measuring price changes of goods on the lines of PPI methodology, thus shifting away from the earlier practice. This shift signaled India’s journey towards PPI.

Once the PPI is fully implemented in India, the country will have improved inflation tracking system, one from the producer side (PPI) and other from the consumer side (CPI). PPI will help in predicting the expected CPI movement and thus taking decision proactively.

The structural reform like PPI explains how the Modi government has a long–term vision for India’s economy. The benefits of PPI will be reaped by the future governments too and are not just limited to the Modi government itself.

But due to the destructive criticism by the opposition and the ecosystem that it nurtures, such structural reforms get painted with a negative brush. We all know as to how the Congress President had mocked and ridiculed the Goods and Services Tax (GST), one of the big structural reforms by the Modi government in the history of independent India. Yet, the people knew who works with an intention of truly putting India on a high growth path and as a consequence, all the investment into anti-reform propaganda failed and will continue to fail.