Price indices (CPI, WPI and IIP) in India

By Stuti Mishra|Updated : January 22nd, 2021

Price index (PI) is a measure of how prices change over a period of time, or in other words, it is a way to measure inflation. Read different types of price indices in India here.

Price index (PI) is a measure of how prices change over a period of time, or in other words, it is a way to measure inflation. Price level rise signifies that the currency in a given economy loses purchasing power. This means less commodities/things can be bought with the same amount of money.

There are three major indices used in India for comprehensive assessment of prices and production.

Wholesale Price Index (WPI)

Wholesale Price Index or WPI measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. It is released by the Economic Advisor in the Ministry of Commerce and Industry.

  • An upward surge in WPI indicates inflationary pressure in the economy.
  • The base year is taken 2011-12 in India.
  • Major components of WPI are primary articles subdivided into Food Articles and Non-Food Articles.
  • Other component: Fuel & Power, Manufactured Goods like Textiles, Apparels, Metals, Sugar, Oils and more.
  • The monthly WPI shows average price changes of goods usually expressed in ratios or percentages.
  • However, it does not include services such as the health, IT, Education, transport and unorganized sector etc.

Consumer Price Index (CPI)

It measures retail inflation in the economy by collecting the change in prices of common goods and services like food, housing, apparel, transportation, electronics, medical care, education, etc. This provides insights as to how much a consumer can spend to be on par with the price change.

  • There are 4 consumer price index numbers in India:
    • CPI for Industrial Workers
    • CPI for Agricultural Labourers
    • CPI for Rural Labourers and
    • CPI for Rural Labourers.
  • CPI has much larger weightage of primary articles then WPI which is 57%. Hence, food inflation is reflected much more appropriately in the CPI when compared to the WPI which gives only 20% weightage to primary articles.
  • RBI had adopted the new Consumer Price Index (CPI) (combined) as the key measure of inflation. The national CPI is meant to measure retail inflation. This index will combine urban and rural CPIs, both under preparation and to be released simultaneously. Unlike many other countries, India does not have a unified CPI and uses the WPI as a benchmark. The unified CPI will usher in a fundamental shift in the way the Reserve Bank of India (RBI) targets inflation.
  • Current Update: Central Government in the Official Gazette has notified 4% Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6% and the lower tolerance limit of 2%.

Index of Industrial Production (IIP)

  • Index of Industrial Production data or IIP is an index that tracks manufacturing activity in different sectors of an economy.
  • It is a key economic indicator of the manufacturing sector of the economy.
  • It explicitly reflects the industrial activities in the Indian economy and gives a measure of the performance of the industries during a given period in a chosen base period.
  • IIP index is currently calculated using base year as 2011-2012 
  • Number of item groups has been in IIP is increased from 399 under 2004-05 series to 407 under the 2011-12 series.
  • Each item group may contain several sub-industries.
  • In the new base year (2011-12), these 407 item groups are divided into 3 sectors: Mining (1 item group), Manufacturing (405 item groups), and Electricity (1 item group) with weights of 14.37%, 77.63% and 7.99% respectively.
  • National Statistical Office (NSO) of Ministry of Statistics and Programme Implementation (MOSPI) releases it

GDP Deflator

  • Used to calculate overall price rise.
  • Known as implicit price deflator.
  • GDP Deflator= (Nominal GDP/Real GDP) × 100
    Here Real GDP- GDP calculated at constant Price
    Nominal GDP- GDP calculated at current Price
  • The GDP deflator is the most accurate because it covers all goods and services produced in the economy. The other indices (WPI and CPI) derive from price quotations for select commodity baskets.
  • The government does not use it because GDP deflator data comes quarterly (not weekly/monthly basis).

 Attempt Quiz on Price Indices in India

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