Relevance of Wholesale Price Index (WPI)

  • Category
    Economy
  • Published
    22nd Oct, 2019

As Indian economy experiences demand slowdown and quashing of growth forecasts, a close look at the WPI can help gauge the extent of this slowdown.

Context

As Indian economy experiences demand slowdown and quashing of growth forecasts, a close look at the WPI can help gauge the extent of this slowdown.

About

  • Wholesale Price Index (WPI)-based inflation used to be the nominal anchor for the Reserve Bank of India’s (RBI’s) monetary policy.

     Definitions

    • Consumer Price Index
      • CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
      • Changes in the CPI are used to assess price changes associated with the cost of living.
      • In India, CPI (Rural/Urban/Combined) is published by the Central Statistics Office (Ministry of Statistics and Programme Implementation) and CPI (IW/AL) is published by Labour Bureau in the Ministry of Labour and Employment. It is published on monthly basis
      • The base year is 2012.
    • Wholesale Price Index (WPI)
      • WPI is an index that measures and tracks changes in prices of goods; at the factory, mandi, and essentially at various levels in the supply chain, before they reach the end consumer (retail level).
      • In India, WPI is prepared by Office of Economic Adviser, Ministry of Commerce and Industry on a weekly basis.
      • The base year is 2011-12.
    • Monetary Policy
      • Monetary policy is the policy mostly drafted by a competent monetary authority of a country.
      • The objectives include; controlling inflation, consumption, growth, and liquidity.
      • These are achieved by actions such as modifying the interest rate, buying or selling government bonds, regulating foreign exchange rates, and changing the amount of money banks are required to maintain as reserves.
    • Inflation-Targeting
      • Inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the medium-term and announces this inflation target to the public.
  • With the adoption of inflation targeting, RBI changed its nominal anchor to Consumer Price Index (CPI)-based inflation.
  • This change made sense because services constitute a big component of demand, and was not captured by WPI.
  • Recently, WPI is witnessing a persistent downward trend. Manufactured products inflation have become negative, and slipped into
  • Falling WPI corroborates with slowdown in Economy.

What does declining trend in WPI mean?

  • WPI captures the pricing power of manufacturers. A prolonged period of low WPI indicates erosion in pricing power of manufacturers/Indian companies.
  • A sharp fall in WPI indicates that the demand slowdown is pervasive in all parts of the economy.
  • The depressed demand conditions mean producers cannot raise prices, and may have to offer discounts to break the trend of falling sales, as witnessed in the auto sector
  • The reason behind WPI collapse is fall in global commodity prices (mostly basic metals prices).

How is WPI more relevant today?

  • CPI often mimics WPI trends, but lately WPI- and CPI-based inflations are digressing away from each other. This is mostly due to their varied compositions.
  • Imported Inflation
    • Imported inflation is a general and sustainable price increase due to an increase in costs of imported products.
  • Bearish expectations
    • A negative outlook on business activity for a future period of time.
    • A bearish market points to an expectation that the prices will go down.
  • The large weightage of 64% accorded to manufactured products in WPI, helps WPI capture the current demand slowdown in the economy more accurately, than does CPI.
  • This makes WPI more relevant today than before.
  • WPI can be used in assessing economic growth, since it captures the imported inflation/
  • Most multilateral organizations have slashed their forecast on India’s economic growth for FY20.
  • Against this backdrop, perhaps a focus on WPI’s trajectory can help determine the depth of demand slowdown, and the extent of bearishness in expectations of both business and consumer.

© 2020 Basix Education Pvt. Ltd. All Rights Reserved