New, broader price index to have 2004-05 as base

New, broader price index to have 2004-05 as base

To help measure India’s annual rate of inflation, the government is proposing to roll out a new price index next year that will not only be more representative of the economy, but will also measure more than five times the items currently in WPI, or the wholesale price index.

To be called the Producer Price Index (PPI), the index will have a base year of 2004-05 and extend to 2,000 products.

Abhijit Sen, member of Planning Commission, who heads a working group that is looking at expanding and updating the existing index, says the existing 435-item WPI, which uses 1993-94 as a base, “may be underestimating inflation".

Essentially, such underestimating means that the relative prices of food and processed foods as well as primary articles such as metals, which have seen severe inflation in recent years, are higher than what they seem officially, eroding current household budgets and future savings of the average Indian.


Inflation in a country such as India, with an estimated 300 million living in abject poverty, is a politically sensitive subject. All the more, because the government has not been able to put in place effective social safeguards, such as access to subsidized foodgrain through the public distribution system.

The double-digit inflation in prices of cereals and pulses between December 2006 and March this year forced the government to announce several indirect tax reliefs to reduce the prices, such as a ban on exports and a ban on futures trading of select food items on commodity exchanges.

Once PPI is adopted, and the single goods and services tax, or GST, is in place by 2009-10, which will do away with the cascading effect of indirect taxation and ensure uniformity across the country, it will become easier for the authorities to identify the causes of inflation. This is because PPI, which doesn’t take into account taxes, trade margins and transport costs, is a basic factory price. By comparing the retail price to PPI, the authorities would find it easier to identify any speculative activity and take appropriate policy measures.

Confirming that PPI will have a 2004-05 base, Suresh D. Tendulkar, chairman, National Statistical Commission, says: “In fact, we are now thinking of updating even the Index of Industrial Production (IIP) to a base of 2004-05, since it, too, is suffering from a problem of data collection. For all our primary statistical indicators, we’d like to have as recent a base as possible."

The Sen committee, formed in 2004, was initially tasked with updating WPI to 2000-01, to match with the most popular retail price inflation measure, the Consumer Price Index (CPI) for Industrial Workers, which has a base of 2001 and is used by the government and public sector to index wages.

All the four CPIs, which are biased towards food items, reported an average inflation of 6% at the end of October. On the contrary, the latest WPI reported a rate of 3.65%.

Says Gurudas Dasgupta, general secretary, All India Trade Union Congress: “The government is practising statistical deception by using the WPI to gauge inflation. In the past year, retail prices have gone up by at least 25%."

According to Sen, it was precisely to avoid such criticism and the lack of ready availability of 2001 producer price data that the committee had decided to shift the base year to 2004-05. Underestimating wholesale prices impacts prices of several services, such as tolls, that are indexed to it. According to a senior official at the National Highways Authority of India, or NHAI, the toll rates are linked 100% to WPI and revised once a year.

Sen explained that since data is currently not made available in a uniform time period, there is a tendency for the inflation measure to spike unexpectedly or stay dormant for long periods. As a result, the actual price rise of a product would not be truly reported, until after the final data is submitted after eight weeks.

Says Shashank Bhide, senior research counsellor with NCAER, an independent think tank: “The structure of the economy has changed so rapidly that a WPI with a base of 1993-94 and 435 items cannot possibly reflect the changes. While much would depend on the weighting diagram and the number of items, the new series is bound to show higher inflation."

According to him, the new PPI should also include prices of imported goods, which have begun to increasingly find their way into the consumption basket of select consumer groupings.

However, according to chief statistician of India Pronab Sen, frequent changes of the base is likely to yield a lower inflation rate, and not higher.

“Recent inflation has been concentrated in primary (agricultural) articles, whose share will go down further in the new series, while manufactured products, whose share will rise, might show a levelling off," he says.

“The expansion of food items is bound to include more processed food products. That won’t come under primary articles," says Bhide.

Though economists believe that it is imperative to update the base year to recognize the transforming structure of the economy, generating the data wouldn’t be easy, especially as getting prices still remains a problem.

“We sent out about 5,000 questionnaires initially, but less than 5% sent us the 2001 prices," notes Abhijit Sen.

There are two issues before the Sen committee: to get firms to send enough data to release the index, the technical work for which is ready, and then to make sure data flows every week. This is an issue, because, unlike other countries, inflation is measured weekly in India and not every month.

While Sen is also likely to recommend switching to a monthly system with the new PPI, he also proposes to include, for the first time, price submissions from small enterprises—a challenging task because they are large in number and spread out all over the country.

WPI is compiled by the department of industrial policy and promotion in the industry ministry and 72% of the prices originate from manufacturing firms. Says one official in the ministry who didn’t want to be identified: “We’re looking into the problem. We are trying to make sure that everybody responds, but let the committee give its report."

With industrial liberalization, the department has little leverage or incentives to make firms supply data, resulting in a void, Sen says.

One way out would be using the National Sample Survey Organisation (NSSO), which concluded its 61st large sample (it covers at least 100,000 households) round in 2004-05 and is, therefore, sitting on vast consumer expenditure data for both rural and urban areas for that year.

The problem with that is “the NSSO data makes compiling the consumer price index easier. But it’s a much tougher job getting the data from the producers directly. WPI is essentially a producer price index, skewed towards manufacturers", Abhijit Sen explains.

While the regional offices of NSSO have been roped in to pursue the data providers, the committee is also exploring using price data collected by the excise department.

“This would still be a pilot, and we’re not sure of the outcome because the department itself is not happy with its data. Also, since excise rates vary directly with the value or quantity of sales of the product, the data may contain inherent bias," he says.

For WPI, the firms are picked from the annual survey of industries list, compiled by the Central Statistical Organisation. For each product, the 10 biggest firms are asked to submit prices. The prices for the primary products, such as grains or minerals, as well as from big manufacturing firms are easily and regularly available. It is the medium-size firms, by revenues, which are most reluctant to respond, Abhijit Sen says.

Pronab Sen says his ministry is trying to add more teeth to the Collection of Statistics Act to tackle such problems. The standing committee of Parliament attached to the ministry of statistics is collecting suggestions on the draft amendment, before sending it along to the cabinet. “We’ve asked for summary proceedings, which will hopefully make it easier to deal with tardy respondents. But the law won’t come before the Budget session," he adds.

Separately, the commerce ministry has also commissioned a service price index, which was initially planned to be merged with WPI. Abhijit Sen says since the service price panel has not yet decided on a definition of what constitutes a service, the report was unlikely to be approved soon and hence the new price index would not be delayed.