New inflation index to give truer price picture

The government could in the long run consider switching to a monthly Producer Price Index (PPI) from the current weekly Wholesale Price Index (WPI).

According to Planning Commission officials, India should consider following the international practice of having producer and consumer price indices.

The revised Wholesale Price Index (WPI) is expected to be in place before the end of the current fiscal. The new index, with 2000-01 as its base year, will include an updated basket of items.

Also, the weights of different groups will be recalibrated to reflect the changing economic scenario. Items from the small-scale sector are being considered for inclusion in the index.

At the same time that the new WPI is introduced, the government will also introduce an experimental PPI. "The PPI is an experimental one and could include a few services as well," said Planning Commission Member Abhijit Sen, who heads the committee on revamping the WPI.

The PPI will include services like rail transportation, road transportation, telecom, construction costs and financial services like banking.

Prices of goods for final consumption that will be part of the PPI will not include the excise tax component. However, intermediate goods will be inclusive of taxes as these are paid by producers, according to Sen.

The weightage given to different items in the PPI will be very different from that in the WPI. "The PPI weights will be closer to the value-added weights and therefore quite different from those in the index for wholesale prices," Sen said.

For agricultural commodities, the PPI will consider the prices received by farmers. The first point of sale prices would be included and not those paid in places like Mumbai or Delhi, the last point of sale prices, Sen added.

The new WPI will be structured in a way that the problems encountered in data collection are avoided. For instance, in several sectors, less than three price quotations are taken for the formulation of the index.

So, even if no quotations come in, the price is assumed to have remained unchanged. This practice has led to provisional and final inflation levels as reported by the WPI differing sharply.