Shifting from WPI to PPI desirable, but less than easy

India is transitioning from the Wholesale Price Index (WPI) to the Producer Price Index (PPI) to better measure inflation. A committee was formed in December 2023 to improve WPI and to recommend a roadmap for transitioning to PPI, with an 18-month timeline for its recommendations. This move addresses longstanding issues with WPI, such as its exclusion of services, and aims to improve inflation measurement and policy-making.

Challenges in Transition

• Data Collection Issues: A significant hurdle in adopting the PPI is the difficulty in collecting accurate data, especially when distinguishing between prices at the intermediate and final levels for services. This data complexity will impede the smooth implementation of the PPI.
• Technological Requirements: The transition will require sophisticated IT systems to handle the new data collection mechanisms, which will incur high costs. Additionally, bureaucratic delays and lack of expertise are expected to slow down the process further.
• Reluctance of Firms: Firms may be reluctant to provide the necessary data, complicating the transition. The success of the PPI implementation will depend on the government's commitment and the willingness of businesses to cooperate.

Benefits of PPI over WPI

• Inclusion of Services: Unlike the WPI, which only covers goods, the PPI includes services, construction, and domestic production from the first commercial transaction, making it a more comprehensive inflation measure.
• Granularity and Stability: The PPI is more granular and stable than the WPI, providing better insights into price changes and offering improved policy guidance, particularly for the Reserve Bank of India in formulating monetary policies.
• Better GDP Deflator: The PPI offers a better measure of the GDP deflator, which is crucial for accurate economic assessments. Most G20 countries already use the PPI, underscoring its global recognition as a more effective inflation measure.

Delays and Historical Context

• Previous Committee Recommendations: A previous committee, the Goldar Committee, had already conducted extensive research into transitioning to the PPI and submitted its recommendations seven years ago. Despite its findings, no action has been taken so far, and the current committee risks reinventing the wheel.
• Prolonged Timeline: The newly formed committee has been given 18 months to submit its recommendations, which critics argue is unnecessary given the groundwork laid by the Goldar Committee. Even if it delivers its report early, the index transition will still lag by several years.
• Government’s Role: The success of transitioning to the PPI largely depends on the government's determination and proactive efforts. Past delays indicate that the process may take longer than expected, despite the clear need for change.

Practice Question

Q. Examine the challenges and benefits associated with India’s transition from the Wholesale Price Index (WPI) to the Producer Price Index (PPI). How can this transition enhance the accuracy of inflation measurement and policymaking?