GS-3: Indian Economy, Mobilization of Resources, Growth and Development

Key phrases: WPI, CPI, Office of economic advisor, food inflation, retail inflation, CSO

Why in News:

• Producers’ inflation based on the Wholesale Price Index (WPI) reached an all-time high in the current series at 14.2 per cent in November. This is the eighth successive month of double digits WPI.

What is Wholesale Price Index (WPI)?

• The Wholesale Price Index (WPI) reflects changes in the average prices of goods at the wholesale level — that is, commodities sold in bulk and traded between businesses or entities rather than goods bought by consumers. There are certain limitations in using WPI as a measure for inflation, as WPI does not consider the price of services, and it does not reflect the consumer price situation in the country
• WPI is released by the Economic Advisor in the Ministry of Commerce and Industry.

Components of WPI:

• The WPI comprises of three major groups:
  • Primary Articles (eg- Food Articles, Vegetables, Milk, Minerals etc.)
  • Fuel and Power (eg- LPG, Petrol etc.)
  • Manufactured Products (eg- manufacture of food products, sugar, manufacture of textiles etc.)
  • The weights of the three major group of items in WPI are shown Below

Uses of WPI:

• The main uses of WPI are the following:
  • To provide estimates of inflation at the wholesale transaction level for the economy as a whole. This helps in timely intervention by the Government to check inflation in particular, in essential commodities, before the price increase spill over to retail prices.
  • WPI is used as deflator for many sectors of the economy including for estimating GDP by Central Statistical Organisation (CSO).
  • WPI is also used for indexation by users in business contracts.
  • Global investors also track WPI as one of the key macro indicators for their investment decisions.
  • The WPI-based inflation is used by the government in preparation of fiscal, trade, and other economic policies.
  • Business organisations, policymakers, accountants, and statisticians use WPI as an indexing tool to formulate price adjustment clauses.

  

Wholesale Price Index (WPI) Vs Consumer Price Index (CPI):

• WPI reflects the change in average prices for bulk sale of commodities at the first stage of transaction while CPI reflects the average change in prices at retail level paid by the consumer.
• The prices used for compilation of WPI are collected at ex-factory level for manufactured products, at ex-mine level for mineral products and mandi level for agricultural products. In contrast, retail prices applicable to consumers and collected from various markets are used to compile CPI.
• The reasons for the divergence between the two indices can also be partly attributed to the difference in the weight of food group in the two baskets. CPI Food group has a weight of 39.1 per cent as compared to the combined weight of 24.4 per cent (Food articles and Manufactured Food products) in WPI basket.
• The CPI basket consists of services like housing, education, medical care, recreation etc. which are not part of WPI basket. A significant proportion of WPI item basket represents manufacturing inputs and intermediate goods like minerals, basic metals, machinery etc. whose prices are influenced by global factors but these are not directly consumed by the households and are not part of the CPI item basket.
• Thus even significant price movements in items included in WPI basket need not necessarily translate into movements in CPI in the short run. The rise or fall in prices at wholesale level spill over to the retail level after a lag.
• Similarly, the movement in prices of non-tradable items included in the CPI basket widens the gap between WPI and CPI movements. The relative price trends of tradable vis a vis non-tradable is an important explanatory factor for divergence in the two indices in the short term.

Source: The Hindu BL

Mains Question:

Q. What do you understand by WPI? Why sometimes there is a divergence between WPI and CPI?