- [Act 1] WHO calculates WPI, CPI, IIP?
- [Act 2] WHEN they publish WPI, CPI, IIP?
- [Act 3] WHERE do they get data for WPI, CPI, IIP?
- [Act 4] WHAT are the components of WPI, CPI, IIP?
- [Act 4] WHY REVISE WPI, CPI, IIP series?
- [Act 5] WHY WPI, CPI, IIP important?
- [Act 6] Other indexes
- [Act 7] Laspeyre’s formula
Chapter 4: Prices and Monetary Management. Three subparts
- Monetary management, measures of money supply, Urjit Patel
- Indexes’ Theory: WPI, CPI, IIP, Services index and others
- Indexes’ Current: Survey observations on WPI, CPI & IIP, How to combat inflation.
Wait…what happened to remaining chapters?
- Ch. 8 to 13 published as articles.
- Chapter 1 to 3; 5 to 7 available as powerpoint and videos. (Will release them as articles after prelims and its “unofficial” answerkey.)
|IIP||Same as CPI|
WPI data publication
If holiday, then WPI data released next working day.
So far we know, who makes the index, and when they release it. But WHERE do they get the statistical inputs?
|Primary articles||Respective ministries, dept, PSU, State Governments|
|Fuel and power||Same as above|
|Manufactured products||Leading manufacturing units|
Problems in Data collection
- Since the collection of prices is on voluntary basis, the flow of price data, especially from manufacturing units, becomes irregular leading to problems in compilation of Wholesale price index.
- Economic Adviser has created a webportal, so factory owners can directly supply data. But momentum not picked up yet. Seems they’re too busy changing profile pics on facebook.
- Therefore, Economic Advisors has made arrangement with NSSO to collect price data from the manufacturing units, until webportal becomes popular.
|Urban areas||NSSO officials survey. Data entered into NIC web portal.|
|Rural areas||NSSO officials + Postal Officials (if NSSO can’t reach). Not all villages surveyed, only ~1200 villages.|
|IIP information Supplier||Items|
|DIPP: Dept of Industrial Policy & Promotion||430|
|Indian Bureau of Mines||61|
|Iron & Steel Joint Committee||47|
|Chem. & Petrochemicals Dept.||47|
|Directorate of Sugar||1|
|Central Electricity Authority (power Min.)||1|
- Economic Advisor, Lespeyer’s formula, Base year 2004.
|Manufactured ProductsInternal weight: Chemical >metal > food||64.97|
|Primary Articlesinternal weight:Food > Nonfood > Mineral||20.12|
|Fuel & Powerinternal weight: Mineral oil > Electricity >Coal||14.91|
These three categories are further subdivided into picture worth 1000 words.
- Number we get from all components viz. primary, fuel and mfg.
- core means, we should ignore food and fuel part.
- So, core inflation = Only WPI of Non-food manufacturing industries.
- Headline WPI – (primary + fuel + food mfg. industries)
- CSO calculates using Lespeyer’s formula, Base year 2010
- Five category of items. I’ve arranged them in descending order of WEIGHT (Combined All India)
|Food, beverages, tobacco||59.31||37.15||49.71|
|Misc.Health edu etc.||24.91||28||26.31|
Mind it: Rural CPI doesn’t consider Housing inflation.
|Ranking||within that highest weightage given to|
|food, bev., tobacco||Cereal > Milk >Veggies > …..Sugar (lowest)|
|Fuel and light||no subgroup|
|clothing, bedding, footware||(Clothing-bedding) > Footware|
|Misc.||Transport > Medcare > Household requisites>…>Recreation (lowest)|
The number you get from combined data of above categories.
Core CPI =Headline CPI MINUS (food and fuel components.)
- By the same good folks who calculate CPI (=CSO-walla)
- Using same Laspeyre formula
- Using same base year: 2010
- If total weight of CPI = 100, then Food price index = ~52% of its weight
|Cereals and products||36.71||28.51||34.16|
|Milk and products||16.53||21.59||18.1|
|Oils and fats||8.98||9.44||9.13|
|Egg, fish and meat||6.5||7.38||6.77|
|Pulses and products||6.25||6.11||6.2|
|Condiments and spices||4.1||3.79||4|
So far we are done with components of WPI, CPI and food inflation. Moving on
- Mind it: Total weight is 1000. So, if you want percentage weight, then shift decimal one point to left.
- For example: manufacturing weight = 75.5%
IIP data released in two formats
- Sector wise: Mining, mfg, electricity (that we just saw above.)
- Goods category wise using the same components as above, but data presented for goods category wise….as shown below.
|Basic Goods||Any bulk raw material/product used in manufacture. High Speed Diesel, Aviation Fuel, Kerosene, Urea, Cement all kinds, Granites, iron, copper and Electricity|
|Capital Goods||Plants, machinery and goods used for further investments. Boilers, compressors, engines, Transformers, Commercial Vehicles and all machineries like Textile Machinery, Printing Machinery etc.|
|Intermediate Goods||used for manufacturing of another product. Cotton yarn, Plywood, Adhesives, Aluminum and steel pipes etc.|
|Consumer durable||can be used for more than 2/3 years). Pressure Cooker, AC, tyre, Tv, mobile, automobile, Gems and Jewelry etc.|
|Consumer non-durable||can’t be used for long periods. Fruit Pulp, edible oil, milk powder, tea, Cigarettes, Apparels, Newspapers, Antibiotics etc.|
IIP-8 core industries
- Within IIP, following 8 are core industries because they’ve impact on almost all other economic activities:
- Coal, fertilizer, electricity, crude oil, natural gas, refinery products, steel, and cement.
- IIP is a quantitative index, the productions of items are being expressed in physical terms.
- But for some items, the information is received in “Value” term rather than quantity or volume.
- So, CSO uses WPI as a deflator to convert that “price” into “volume”.
Now time for a “FLASHBACK” in this movie
|index||new series effective from|
So if these are the new series we talked about then what was the system before that?
The WPI series has to be revised often, because of two reasons:
#1: base year
- Inflation is a “relative” concept. When we say there is inflation – it means things used to be cheaper at some previous year.
- So, to calculate WPI, we need a base year. Base year should be revised once in a while.
#2: product mix
- WPI calculates inflation using Laspeyres formula for weighted arithmetic mean.
- But this formula fails to capture the dynamic changes in product mix and structure of the economy over time.
- For example, 15 years ago, price of VCR and magnetic tape cassettes would have mattered. But no one uses them anymore.
- Same way, 15 years ago, people did not buy that much moisturizer creams and perfumes.
- Hence we’ve to keep changing the components.
|BEFORE||AFTER Sen Committee, WPI reform|
|—||New system Started from 2010, Sep|
|Base year 1993||2004|
|—||Increased no. of price quotations|
|—||Added new items.|
List not exhaustive
- Lemon, Gaur Seed, Rose, Jasmine, Marigold
- Crude petroleum, Copper Ore, Zinc Concentrate
- Computer Stationery, UPS, SMPS, VCD player
- Dish Antenna, Fibre Optic Cable
- Perfume, Scent Cream, Moisturizer, Body Powder
- Leather Gloves, jackets, garments, bags
- Football, Toothbrush
|Current WPI||Saumitra recommends|
|676 items||~1200 items.|
|—||Expected to be operational from next year|
|—||Collect prices from more centres, to get better estimate.|
|—||Reduce weight of primary food items. Increase weight of mfg. items|
|Base year 2004||2009, And then to 2011|
Enough of WPI, moving on
|PROLEM Before||SOLUTION After|
|—||Started from 2011, January|
|—||base year 2010|
|Specific groups only.(Baseyear in bracket)|
Problem= doesn’t give “whole” picture
|Item list designed based on NSSO’s 2004 survey. In future, CPI will be revised using NSSO’s 2011 survey.|
Mind it: this doesn’t mean they no longer calculate CPI for industrial workers; Agro & rural laborers. They still do it.
- Each IIP item should have certain minimum contribution to national production.
- For example VCR industry’s contribution in Today’s economy = 0%
- Therefore, need to update list with based on technological changes, economic reforms and consumption patterns of the people.
|IIP Before||IIP After|
|—||C.P. Chandrasekhar Committee|
|Base year: 1993||2004|
|Added new items: Apparels, Gems and Jewellery, Newspapers, pasteurised Milk, Writing & Printing Paper, Ayurvedic Medicaments, Woollen Carpets, Wood Furniture, Terry Towel, Coir Mats & Mattings, Polythene Bags, Instant Food Mixes, Fruit Pulp etc.|
|Information source agencies: 15||16.|
|NIC-1987||Items used from National Industrial Classification (NIC)-2004|
|WHEN?||weekly & monthly||monthly||monthly|
|WHERE they get data?||ministries, dept., industries||NSSO and Postal workers||ministries, dept, bodies|
|Components||3: MFG > Primary > Fuel||5 categories||3: MFG > Mining >electricity|
|types||only one WPI||Rural, urban, combined||Sector wise and goods Usage wise.|
|CORE||non-food manufacturing||headline – (food+fuel)||8 industries|
Yes, why bother calculating WPI, CPI and IIP in the first place!?
Why is WPI important?
Monitors the dynamic movement of prices.
|Who||Why they use WPI?|
|Government||To design trade, fiscal and other economic policies|
|RBI||To design monetary policy, under Multiple indicator method: RBI used WPI. (But Rajan started using CPI for this purpose, since April 2014, on Urjit patel recommendation.|
|Businessmen||In the business contract- to calculate price escalation clauses in the supply of raw materials, machinery and construction work.|
Why CPI important?
Measures the price of goods that households consume.
|Businessmen||Calculating Dearness Allowance|
Why IIP important?
- The IIP measures volume changes in the production of an economy
- Provides a measurement that is free of influences of price changes
- Data used in Government policy planning purposes, Industrial Associations, Research Institutes and Academicians.
|Index||Does it cover service sector inflation?|
|CPI||Partially e.g. education, healthcare|
- Anyways, Economic Advisor started services price indices (SPI). (recall he also does the WPI).
- On experimental basis.
- To capture inflation in following service sectors:
|Railways SPIs||freight and passenger services|
|Telecom SPIs||only for cellular services on the basis TRAI report. Quarterly basis.|
All of them use same Laspeyre’s formula.
- London based Baltic Exchange, releases this index number on daily basis.
- Measures cost to transport raw materials by sea.
|If Baltic number||meaning|
- measures price change from the perspective of the seller.
- i.e. average change in selling prices received by domestic producers for their output.
- Covers both goods + services. (WPI only covers goods)
- Sellers’ and purchasers’ prices differ due to government subsidies, taxes and distribution costs. Therefore, better to use PPI. Bcoz CPI doesn’t cover this.
- Majority of the OECD countries measure inflation based on Producer Price Index (PPI)
- WPI has been replaced in most countries by Producer Price Index (PPI) due to the broader coverage provided by the PPI in terms of products and industries
- PPI has more concordance with system the national account. (compared to WPI)
- Therefore, Office of the Economic Adviser (OEA) has taken up the initiative for constructing a Producer Price Index (PPI) for India.
Some notable countries
- Ireland uses BOTH WPI and PPI
|Only WPI||Only PPI|
|Japan, Australia, Greece, Norway and Turkey||Canada, USA , Aussies, S.Korea, UK, Spain, Italy|
Not for prelims. But when they want to begin “STRESS” interview particularly during bank/MBA.
- Laspeyre was a German economist .
- His formula used in calculation of WPI, CPI, IIP, service price indices.
- It is a Weighted arithmetic mean.
Let’s understand with a crude example.
- Suppose a local thug’s “INFLATION” index uses following format, with 2004 as base year.
- He can only decide the base year and weights assigned to each components on his own. Condition: he should distribute the weight in such manner that total weight is 10, 100, 1000- that way % calculation is easier.
- After that, monetary policies, fiscal policies and market forces will determine the prices in base year and current year. He just has to apply formula.
So, excel data looks like this:
|Components||weight||2004 prices||2014 prices|
|Desi liquor||10||Rs. 10||Rs. 15|
|Gutkha||20||Rs. 2||Rs. 5|
|Cinema||70||Rs. 50||Rs. 75|
First, I’ll find relative price (Current prices divided by BASE year’s prices)
|Components||weight||2004 prices||2014 prices||R|
|Desi liquor||10||Rs. 10||Rs. 15||1.5|
|Gutkha||20||Rs. 2||Rs. 5||2.5|
|Cinema||70||Rs. 50||Rs. 75||1.5|
Now I’ll multiply Relative price with weight assigned to each components
|Components||weight||2004 prices||2014 prices||R||RxW|
|Desi liquor||10||Rs. 10||Rs. 15||1.5||15|
|Gutkha||20||Rs. 2||Rs. 5||2.5||50|
|Cinema||70||Rs. 50||Rs. 75||1.5||105|
- Finally, the addition of RXW will me index number for current year. 15+50+105=170.
- That means Current inflation in 2014, is 70%, compared to the prices in base year 2004.
- In 2015, If I get the number 180=80% inflation than base year (2004)
- But compared to 2014, the 2015’s year on inflation would be (180-170)/170=~6%.
Statistically we can express with this formula:
Note: some books use P0/Q0, it’s basically the same. Because they take “weight” as = (p x q).
|Paasche index||Tells us what today’s “Basket” of commodities, would have cost @yesterday’s price.|
|Fisher index||Geometric mean of (Laspeyrese and Passche). This solve the problem of “substitution bias” in consumer Expenditure.|