Why in News?

The Central government has announced the formation of an expert panel to revise the constituents of the country’s Wholesale Price Index (WPI).

What’s in Today’s Article?

• About Inflation (Meaning, How it is calculated)
• About (WPI, Meaning, How it is calculated, Components, Difference from CPI, etc.)
• News Summary

What is Inflation?

• Inflation is basically the general rise in the price of goods and services and the decline in purchasing power of people.
• This means that when inflation rises (without an equivalent rise in your income), one is able to buy lesser things than previously, or one has to pay more money for the same stuff now.
• A “rising” inflation rate implies that the rate (at which the prices rise) itself is increasing.
  • In other words, imagine a scenario where the inflation rate was 1% in March, 2% in April and then 4% in May and 7% in June.

What is Wholesale Price Index?

• Wholesale Price Index, or WPI, measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
  • Wholesale market is only for goods, one cannot buy services on a wholesale basis.
• It is used to track the supply and demand dynamics in industry, manufacturing and construction.
• The index is released by the Economic Advisor in the Ministry of Commerce and Industry every month.
• The quantum of rise in the WPI month-after-month is used to measure the level of wholesale inflation in the economy.

How is WPI calculated?

• The index is based on the wholesale prices of number of relevant commodities
• The commodities are chosen based on their significance in the region.
  • These represent different strata of the economy and are expected to provide a comprehensive WPI value.
• Number of commodities: 697 items
• Base year: 2011-12

Major Components of WPI:

• ‘Primary articles’ (22.62%) is a major component of WPI, further subdivided into Food Articles and Non-Food Articles:
  • Food Articles: Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish, etc.
  • Non-Food Articles: Oil Seeds, Minerals and Crude Petroleum.
• The next major basket in WPI is Fuel & Power (13.15%), which tracks price movements in Petrol, Diesel and LPG.
• The biggest basket is Manufactured Goods (64.23%). It spans across a variety of manufactured products such as Textiles, Apparels, Paper, Chemicals, Plastic, Cement, Metals, and more.
• Manufactured Goods basket also includes manufactured food products such as Sugar, Tobacco Products, Vegetable and Animal Oils, and Fats.

What are Headline and Core Inflation?

• Headline inflation refers to the change in value of all goods in the basket.
• Core inflation excludes food and fuel items from headline inflation.
• Since the prices of fuel and food items tend to fluctuate and create ‘noise’ in inflation computation, core inflation is less volatile than headline inflation.
• Headline inflation is more relevant for developing countries like India where fuel and food items account for 30-40% of the basket.

What is the Major Difference Between WPI and CPI?

• While WPI keeps track of the wholesale price of goods, the CPI (Consumer Price Index) measures the average price that households pay for a basket of different goods and services.

Why Reserve Bank of India Adopted CPI over WPI?

• On the recommendation of the Urjit Patel Committee (2014), the RBI adopted CPI as the key measure of inflation. Earlier, RBI had given more weightage to WPI as the key measure of inflation for all policy purposes.
• CPI focuses on the change in the cost of living at the consumer’s end, whereas the WPI focuses on the inflation of the economy as a whole.
• For common people, i.e. consumers, it is the CPI that is more relevant than the WPI. CPI also covers the service sector.
• Through CPI, the RBI can increase the span of monetary control and monitor inflation better.
• Therefore, the RBI linked CPI for fixing interest rates in India. 

News Summary:

• The Union Government has announced the formation of an 18-member expert panel to revise the Wholesale Price Index (WPI) and consider transitioning to a Producers' Price Index (PPI).
• This move reflects the structural changes in India’s economy since the WPI's current base year of 2011-12, with a new base year proposed as 2022-23.
• The working group will be led by Ramesh Chand, a member of NITI Aayog.
• Members include officials from various ministries (Statistics, Finance, Petroleum, and Agriculture), representatives from the Reserve Bank of India (RBI), and private sector economists.
• The panel has been tasked to submit its final report by June 30, 2026, to the Office of the Economic Adviser in the Ministry of Commerce and Industry.
• Key Objectives:
  • Enhance the reliability of indices to better reflect economic changes.
  • Address statistical and computational challenges in transitioning to PPI.
• Significance of the Move:
  • This initiative marks a significant step in aligning India’s price measurement tools with global standards.
  • The shift from WPI to PPI aims to offer a more comprehensive reflection of price trends at the producer level, aiding policymakers and industries alike in economic planning.