Producer Price Index to Sharpen India’s Inflation, GDP Data

This year may have been dominated by the turmoil in West Asia, but there is a quiet revolution underway in India’s statistical system. India has overhauled key data releases, with base-year revisions for the Consumer Price Index, Index of Industrial Production, gross domestic product and, most recently, the Wholesale Price Index. Whenever the base year is revised, it is associated with methodological improvements and wider coverage of goods and services either produced or consumed in the economy. 

The revision in the Wholesale Price Index, or WPI, goes beyond the base-year change, with the index being gradually replaced by the Producer Price Index, or PPI.

WPI measures the price of bulk goods in the wholesale market. PPI measures prices of goods and services as they leave the factory gate. The shift towards PPI will make India more compliant with global norms. The shift will happen gradually, with the WPI series published alongside PPI for the next five years. Three PPIs will be released – Output PPI (goods), Input PPI (goods), and Services PPI. The frequency of Output and Input PPI will be monthly, and Services PPI will be quarterly.

The shift from WPI to PPI marks a significant statistical change, with important implications for GDP estimation and inflation measurement.

The first change is that the new base-year series for both WPI and PPI is 2022-23. The old WPI series had a base year of 2011-12. The revised base year ensures that the basket of items covered includes newer additions such as renewable energy, which is now captured by both indices. 

The PPI also captures services, while WPI is limited to goods. At the initial stage, seven services will be captured: banking, securities transactions, insurance, management of pension funds, railways, air transport, and telecom. This is a major change, as to date, services inflation has been captured only by CPI.

This will improve the deflation process for services in GDP. At present, WPI is used to estimate real gross value added, or GVA, for some services when a CPI deflator is not available. Another difference is that PPI covers exporting units, which are not captured in WPI.

The second change is that PPI for output and input prices will be provided separately. This will facilitate double deflation, which is used in real GDP to estimate the manufacturing sector. Under double deflation, the sales of producers are deflated using the output price index, while expenditure is deflated using the input price index. This method considers that output and input prices can have different trends. 

For instance, currently, the West Asia crisis has impacted input prices more, such as fuel, metals, chemicals, etc., while output prices have seen a more moderate rise. The two separate indices will also help gauge margin pressure on producers and the transmission of input cost pressures at various stages of the production chain. Currently, in the 2022-23 base year GDP, double deflation is being conducted by constructing separate price indices for inputs and outputs from WPI. The weights for the index are taken from the Annual Survey of Industries. Once PPI is incorporated, it will make the double deflation process easier both for the Ministry of Statistics and Programme Implementation as well as analysts.

Third, the PPI structure is more aligned with GDP, with subsegments – agriculture, mining, manufacturing, and electricity – in the output index. Meanwhile, the structure of WPI remains the same as in the old base year series – primary articles, fuel, and manufacturing products.

From an inflation perspective, the shift from WPI inflation to output PPI inflation has had minimal impact. The gap between the two inflation measures, output PPI minus WPI, is just -0.1 percentage point. The difference is small because both indices cover only goods. Globally, PPI is a consolidated index covering both goods and services. Currently, the services indicator is being provided separately, as it is available only quarterly. Another limitation is that the coverage of services is limited to seven categories; hence, a consolidated services index has not been provided. Instead, indices for each of the seven services have been provided separately.

The next phase in the evolution of PPI should be to provide a consolidated index for goods and services. This will make the index truly representative of domestic price conditions. Indeed, in GDP, the services sector accounts for a 53% share, while industry has a 29.5% share. The coverage of the services sector will need to be widened well beyond the current seven categories.