The recent proposition of RBI Governor Dr D Subbarao to have a Producer Price Index (PPI) is indeed a significant one. Speaking at the Sixth Annual Statistics Day Conference in Mumbai, Dr Subbarao harped on the inadequacies of the present prevalent indexes—the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). According to Dr Subbarao, “In the present structure, the Wholesale Price Index (WPI) does not capture the price movement of services. Also, it is a hybrid of consumer and producer price quotes”

Despite the fact that CPI which measures changes over time of the general level of prices of goods and services that households acquire for the purpose of consumption and is thus considered as a better measure of inflation than WPI, it lacks on adequate history to “support data analysis” and to be used as a “sole headline measure of inflation.” Dr Subbarao argued that “In contrast to Consumer Price Index (CPI), PPI measure price changes from the perspective of the seller. Sellers’ and purchasers’ prices differ due to government subsidies, sales and excise taxes, and distribution costs. For these reasons, it is, therefore, desirable that we move towards PPI.”

At the same time, Dr Subbarao said that the central bank could not ignore a price index which arguably reflected the most updated economic structure. He was of the opinion that core inflation gives a “better picture of price trends as it is less volatile than WPI-based inflation”.

“The rationale for exclusion is that the prices of food and energy tend to fluctuate sharply and such volatility from the supply side, if passed on into the general price index, makes it difficult to interpret the overall trend,” he said. “The surmise is that core inflation, being less volatile, gives a better sense of future price trends. If one takes a longer series of over three years, there is some evidence that core inflation does not have statistically significant predictive power”, he added.

Dr Subbarao also harped on the difficulties encountered by RBI in “assessing inflationary trends” due to the presence of a large number of indices. “At present, apart from the WPI, India has several measures of inflation. The country had four consumer price indices or CPI— for urban non-manual employees, for agricultural labour, for rural labourer and for industrial workers. In February this year, the Government introduced a new CPI series that has the CPI rural and CPI urban, and a combined CPI that takes in both with suitable weights.” he said.

One cannot disagree with the arguments forwarded by the RBI Governor in support of his proposition for having a Producer Price Index (PPI). We cannot also disagree with the questions he has raised regarding the applicability of the Wholesale Price Index (WPI). This column too had in the past posed questions of the credibility of the WPI and now when the RBI Governor too has hinted at the need of having a separate index, as the one in question, it is imperative that the Government pays due attention to what Dr Subbarao has said and frames a new Index accordingly. This is because since PPI looks at three areas of production: industry-based, commodity-based, and stage-of-processing-based companies, it has an edge over it counterparts in measuring inflation and tracking price changes. However, the focus while framing the index should be based on including the “use-based” classification of items.  In this regard, it would, however, augur well if the Government makes a study of this system already in vogue in the US—employed by the US Bureau of Labour Statistics that has been fairly comprehensive and successful in its assessment.