India is set to replace its long-standing Wholesale Price Index (WPI) with a more comprehensive Producer Price Index (PPI), a shift that will refine inflation measurement and enhance monetary policy transmission, according to DK Srivastava, Chief Policy Advisor at EY India. The first PPI release will use the 2022-23 base year, the same as the latest WPI series, compiled by the Office of the Economic Adviser under the Ministry of Commerce and Industry.
Why the Shift from WPI to PPI?
WPI, which has been published alongside the Consumer Price Index (CPI), suffers from two major shortcomings, Srivastava explained. First, WPI includes indirect taxes and wholesale margins, making it a poor reflection of pure production-stage prices. Second, WPI does not capture the movement of prices in the services sector, which now accounts for a significant share of India's output. "As the economy has become more complex and the share of services in overall output has increased, there is a need to also capture movement in service prices," stated the article. PPI, in contrast, captures prices relevant to the production process without the distortion of indirect taxes net of subsidies or wholesalers' margins, providing a clearer view of technological relations in production.
Components of the New PPI
The PPI comprises three sub-indices:
- Output Producer Price Index (OPPI) – measures prices received by producers for their goods outputs.
- Input Producer Price Index (IPPI) – measures prices paid by producers for their inputs (currently covering only the manufacturing sector on a trial basis).
- Service Producer Price Index (SPPI) – reflects prices received by producers of services. Initially, SPPI covers seven major services: banking, securities transactions, insurance, management of pension funds, railways, air passenger services, and telecom.
All three indices exclude indirect taxes and profit margins, though production subsidies are included.
Implications for Businesses and Contracts
WPI has been widely used by businesses, government agencies, and contracting authorities for indexation, cost escalation, and contract pricing due to its close linkage with input costs, tradable goods prices, energy prices, and supply-side shocks. Indexation to WPI directly affects projected cash flows, tariff revisions, valuation outcomes, and risk allocation between contracting parties. To allow a smooth transition, the WPI compilation will be continued for another five years, giving parties time to adapt contractual arrangements from WPI to PPI.
Weight Structure and Improved Coverage
The PPI is expected to better reflect production cost conditions, including sectoral cost differences. The capture of production structure under PPI is wider than under WPI, and the weight structures are also different, noted the article. This broader coverage will help policymakers and analysts track price movements across both goods and services, strengthening the measurement of inflation for monetary and fiscal policy decisions.
Next Milestone
The first official PPI release with the 2022-23 base year is the immediate milestone, after which the five-year transition period for contractual indexation begins. Businesses and analysts will watch for further methodological details and regular publication schedules from the Office of the Economic Adviser.
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