The
price index is an indicator of the average price movement over time of a fixed
basket of goods and services. The constitution of the basket of goods and
services is done keeping in to consideration whether the changes are to be
measured in retail, wholesale, or producer prices etc. The basket will also vary
for economy-wide, regional, or sector specific series. At present, separate
series of index numbers are compiled to capture the price movements at retail
and wholesale level in India. There are four main series of price indices
compiled at the national level. Out
of these four, Consumer Price Index for Industrial Workers (CPI-IW), Consumer
Price Index for Agricultural Labourers / Rural Labourers (CPI -AL/RL), Consumer
Price Index for Urban Non-Manual Employees
(CPI-UNME) are consumer price indices. The Wholesale Price Index (WPI)
number is a weekly measure of wholesale price movement for the economy. Some
states also compile variants of CPI and WPI indices at the state level.
WPI
is also compiled by many states covering state level wholesale transactions.
Presently WPI series compiled are --
Assam (base 1993-94), Bihar (1991-92), Haryana (1980-81), Karnataka (1981-82),
Punjab (1979-82), U.P.(1970-71) and West Bengal (1980-81). Most of the state
series are cover agricultural commodities only.
Step-wise
introduction to compilation of WPI
Like
most of the price indices, WPI is based on Laspeyres formula for reason of
practical convenience. Therefore, once the concept of wholesale price is defined
and the base year is finalized, the exercise of index compilation involve
finalization of item basket, allocation of weights (W) at item, groups/
sub-groups level. Simultaneously, the exercise to collect base prices (Po),
current prices (P1), finalization of item specifications, price data sources,
and data collection machinery is undertaken. These steps are discussed in detail
in the following sections :
1)
Concept of Wholesale Prices:
Wholesale
price has divergent connotations adopted by the different departments using
them. There is no uniform definition for agricultural and non- agricultural
commodities as all the wholesale prices can not be collected from the
established markets.
Agricultural
commodities: In
practice, there are three types of wholesale markets viz., primary, secondary
and terminal in the agricultural sector. The price movements and price levels in
all three vary. Price movement in the terminal market may tend to converge
toward the retail prices. Option to
collect the wholesale prices for these three different stages of wholesale
transactions exists for agricultural commodities though the primary market is
prepared.
Ministry
of Agriculture has defined wholesale price as the rate at which relatively large
transaction of purchase, usually for further sale, is effected.
Various state agencies concerned with the collection of wholesale prices
of agricultural commodities are following the concept of Ministry of
Agriculture. However, there are certain variation with regard to inclusion or
exclusion of incidental charges, duties and taxes. For e.g., in Andhra Pradesh,
the wholesale prices include incidental charges such as weighment charges, cost
of bags and sales tax. In Gujarat, the wholesale prices are inclusive of packing
charges and taxes. In Punjab and Tamil Nadu, the wholesale prices are inclusive
of incidentals. In Haryana, the wholesale prices for agriculture commodities
exclude taxes but include arat, weighment and the lorry charges, whereas,
non-agricultural products include sales tax, etc.
Non-agricultural
commodities: For
non-agricultural commodities, which are predominantly manufacturing items, the
problem arises, as there are no established sources in markets. This is true of
mining and fuel items also. The issue of ex-factory vis-à-vis wholesale prices
for non-agriculture items have been discussed by the successive Working Groups
set up for the revision of WPI and all have reached the conclusion that in
practice, it is not feasible to collect wholesale prices for most of the
manufacturing items. It has also been observed that the margin of wholesalers in
case of non-agricultural commodities remains unchanged for over a long period of
time. As a result, it is felt that the trends in the index compiled on the basis
of ex-factory prices would not be much different from the index if compiled on
the basis of wholesale prices if it were feasible to get these prices.
The last Working Group has recommended collecting wholesale prices from
the markets as far as possible, because
the economy is moving towards globalisation and open trade with inputs
increasing in the commodities set.
The
wholesale price as defined for WPI: The
concept of wholesale price adopted in practice represent the quoted price of
bulk transaction generally at primary stage. The price pertaining to bulk
transaction of agricultural commodities may be farm harvest prices, or prices at
the village mandi /market of the Agricultural Marketing Produce Committee/
procurement prices, support prices. For manufactured goods the wholesale prices
are administered prices, ex- factory gate/ ex-mill, ex-mine level. Ex- factory
prices exclude rebate if any, other taxes and levies are excluded though excise
duty is currently included.
Wholesale
price and producer price: The
wholesale price as defined above differs from
producer (output) prices as the latter excludes all kind of taxes and
transport charges. In 1993 SNA, Producer(output) price is defined as the amount
receivable by the producer from the purchaser for a unit of a good or service
produced as output minus VAT or similar deductible tax, invoiced to the
purchaser. It excludes any transport charges invoiced separately. It excludes
any transport charges invoiced separately by the producer. However, the producer
(input) prices include retail or wholesale margins.
2)
Choice of Base Year
:
The
well known criteria for the selection of
base year are (i) a normal
year i.e. a year in which there are no abnormalities in the level of production,
trade and in the price level and price variations, (ii) a year for which
reliable production, price and other required data are available and (iii) a
year as recent possible and comparable
with other data series at national and state level. The National
Statistical Commission has recommended that base year should be revised every
five year and not later than ten years.
3)
Selection of Items, Varieties/ Grades, Markets:
To
ensure that the items in the index
basket are as best representatives as possible, efforts are made to
include all the important items transacted in the economy during the base year.
The importance of an item in the free market will depend on its traded value
during the base year. At wholesale level, bulk transactions of goods and
services need to be captured. As the services are not covered so far, the WPI
basket mainly consists of items from goods sector. In the absence of single
source of data on traded value, the selection procedures followed for
agricultural commodities and non-agricultural commodities have also been
different.
Agricultural
commodities:
As there is a little scope of emergence of new commodities in the agriculture,
the selection of new items in the basket is done on the basis of increased
importance in wholesale markets. Varieties, which have declined in importance,
need to be dropped in the revised series. Final inclusion or exclusion of an
item in the basket is based on the process of consultation with the various
departments. The exercise of adding /deleting commodities, specifications and
markets is completed once the consultation process is over. In the existing WPI
series, items, their specifications and markets have been finalized in
consultation of with the Directorate of E&S (M/O Agriculture), National
Horticulture Board, Spices Board, Tea board, Coffee Board and Rubber Board, Silk
Board, Directorate Of Tobacco, Cotton Corporation of India etc.
Mining
Items: For
deciding on the inclusion and exclusion of mineral items, their grades, market
centers etc. suggestions of Indian Bureau of Mines are taken into account.
Specifications of coal, coke and lignite have been decided in consultation with
the Department of Coal. Likewise for selection of petroleum products the
Ministry of Petroleum is consulted and for electricity suggestions are taken
from Central Electricity Authority.
Manufactured
Products: Selection
of items from manufacturing sector, as a whole, is the most tedious and time
taking process. To ensure complete coverage, selected items have to represent
not only the organized manufacturing sector but also vast informal sector.
a)
Organized Manufacturing Sector:
Regular time series data on value of production are available through Annual
Survey of Industries covering factory sector. The criterion for selection of
items has been based on the cut off traded value of a product during the base
year. The traded value of a product is the sum total value of output as per ASI
base year+ Excise duty + Imports during base year- Exports during the base year.
WPI 1993-94 adopted a cut off traded value of Rs. 120cr. All possible efforts
are made to establish a proper concordance between the NIC classification
adopted in ASI and ITC (HS) classification for imports and exports quantum. The
problem of concordance arises in case of textile items and for this segment; the
selection of items has been done with the help of Office of the Textile
commissioner. Some of the items may not feature in the final basket even though
the traded value is above the cut off point. This may be due to poor
specifications or non-availability of regular data source for continuous
pricing.
b)
Unregistered /
unorganized manufacturing sector:
Units falling in this sector add substantial portion to the total manufacturing
production in the economy. Unorganized manufacturing sector covers traditional
sectors like handlooms, sericulture, coir, khadi and village industries and
modern segments like SSI and power looms. Further the small-scale sector
encompasses both organized and unorganized segments of the manufacturing sector.
But for informal sector, all encompassing time series data on value of
production are not available. In the past, Working groups have made efforts to
pool value of production data from disparate sources like results of surveys on
Own Account Enterprise (OAE), Directory Manufacturing Establishment (DME) and
Non-Directory Manufacturing Establishment (NDME), Economic Census and its follow
up surveys and Census of Registered SSI units. The last Working group could not
use these data sources mainly because it found the data available either farther
from the chosen base year or were incompatible. However, some items from silk.
coir, power looms and handlooms based were included on the suggestions of
agencies responsible for these segments.
The
selection of specification/ grade/ variety in respect of manufactured products
as also the selection of sources for supplying regular price data is done with
help of production data. Selection of data sources is done on subjective
sampling basis. For each item, a list of 10 major manufacturers/ producers is
prepared and efforts are made to seek willing cooperation from the top five
manufacturers for regular supply of weekly wholesale price quotations. Data
collection is done on conditions of confidentiality. At least five price
quotations in respect of representative grades are included in the index. In
case there are less then five manufacturers of an item, then all the units are
roped in to furnish the price data.
4)
Derivation of Weighting Diagram
:
Weights
used in the WPI are value weights not quantity weights as its difficult to
assign quantity weights. Distribution of the appropriate weight to each of the
item is most important exercise for reliable index. Unlike consumer price
indices, where weights are derived on the basis of results of Expenditure
Surveys, several sources of data are used for derivation of weights for WPI.
Because
of non-availability of updated Supply and Use Table (SUT), the approach, finding
favour with the successive Working groups, is based on top down stratified
compartmentalized system. Under this approach, weights are first assigned at
Major group level from outside with due account made for exclusion of services
from the total value of transactions in the economy. This method for weighting
diagram represents more accurately structural changes at higher level of
aggregation. Further, compartment system also ensures that wherever data for a
more recent year are available they can be used, while in other compartments
data from more distant year can be achieved. This has also made it possible to
use different sets of data sources for agricultural and manufacturing items.
Weights
of Agriculture commodities:
For building of the weights of agricultural commodities, the data on sale
of agricultural commodities is not available as there is large number of
markets. Therefore, to arrive at the approximate traded value of agricultural
commodities; an indirect method of arriving such estimates is
used. These weights are based on the Marketed value (MV) arrived at by
multiplying Marketed Surplus Ratio (MSR) to the estimates of Value Of Production
(VOP) of agricultural commodities. The
estimates of VOP are based on the estimates of quantity of production, as
brought out by the Directorate of Economics and Statistics(DES), and an average
price of a commodity.
The
ratio of quantity marketed to quantity produced gives the MSR.
MQ
Marketed Quantity
R
= ---------- =
-------------------------
QOP
Quantity of Production
The
estimates of MSRs are based on the results of Comprehensive Scheme on Cost of
Cultivation of DES and other sources. The Directorate of Marketing and
Inspection, M/O Agricultural, is also responsible to generate MSRs.
In
practice MSRs are worked out on the basis of production value of three years
average production to remove the bias on account of fluctuation in individual
commodity and over all production. No estimates of MSRs are available in the
case of new items of fruits, vegetables and flowers, and these are finalized
separately by the working group, based on the related crops. MSRs of flowers and
meat items are kept 100 considering that production of these is mainly for
market sale.
Manufactured
items:
As discussed above, the traded
value of manufactured products i.e., total production + excise duty+ imports -
exports value for the year are worked out from various sources.
Final weights of each item is based on its traded value plus pro rata
imputed traded value of items which need to be excluded from the basket due to
various reasons.
In
the current series traded value of items falling under ‘Other manufacturing’
have been imputed amongst other items in the remaining sub-groups of
‘Manufactured products’ as there was only one item featuring above the
cut-off mark. Retaining it would have led to extreme fluctuations.
Similarly weight of crude petroleum was distributed pro rata amongst fuel
items, as procuring its wholesale prices was not possible.
5)
Collection of Prices:
In
WPI pricing methodology used is specification pricing. Under this, in
consultation with the identified source agencies, precise specifications of all
items in the basket are defined for repeat pricing every week. All
characteristics like make, model, features along with the unit of sale, type of
packaging, if applicable, etc are recorded and printed in the price collection
schedule. At the time of scrutiny of price data all these are kept in mind. This
pricing to constant quality technique is the cornerstone of Laspeyres formula.
In case of changes in quality and specifications, due adjustments are made as
per the standard procedures.
The
collection of base prices is done concurrently while the work on finalisation of
index basket is on. Therefore, price collection is normally done for larger
number of items pending finalisation. Once the basket is ready, current prices
are collected only as per the final basket from the designated sources. Weekly
prices need to be collected for pre-determined day of the week.
For the current series prices are quoted on the basis of the prevailing
prices of every Friday. Agricultural wholesale prices are for bulk transactions
and include transport cost. Non- agricultural prices are ex-mine or ex-factory
inclusive of excise duty but exclusive of rebate if any.
6)
Treatment of prices collected from open market & administered prices:
There
are some items which constitute part of index baskets but the prices for these
items are either totally administered by the Government or are under dual
pricing policy. The issue of using administered prices for index compilation is
resolved by taking into account appropriate ratio between the levy and non-levy
portions. Where these ratios are not available, the issues can be resolved
through taking the appropriate number of price quotations of the administered
prices and the open market prices after periodic review.
Due
to variation in quality and different price movements of the commodities
belonging to unorganized sector, separate quotations from organized and
unorganized units have to be taken and merged based on the turnover value of
both the sectors at item level. For pricing from unorganized sector, adequate
number of price quotations has to be drawn out of the list of units by criteria
of share of production as far as possible.
7)
Classification structure:
The
Working Groups over the period have been suggesting to bring the classification
of various items under different groups and sub-groups as per the latest revised
National Industrial Classification (NIC) which in turn is comparable to
International Standard Industrial Classification (ISIC).
The classification based on NIC renders the WPI data amenable to
comparison with the Index of Industrial Production (IIP) and National Income
data.
The
grouping and classification of WPI is also useful for in depth analysis as
separate inflation rates can be worked out for groups with items whose prices
are given to extreme fluctuations, affected by international prices or have
administered prices. Apart from the headline inflation based on WPI, core
inflation, manufactured products inflation, primary articles inflation etc. can
be easily computed. The
classification structures adopted in the WPI (1993-94) series is as below:-
Major
Group/Groups
|
I.
Primary Articles
i)
Food Article
ii)
Non-Food Articles
iii) Minerals
|
II.
Fuel, Power, Light
& Lubricants |
|
III.
Manufactured Products
i)
Food Products
ii)
Beverages, Tobacco & Tobacco Products iii)
Textiles
iv)
Wood & Wood Products v)
Paper & Paper Products vi)
Leather & Leather Products
|
vii)
Rubber & Plastic products
viii)
Chemicals & Chemical Products ix)
Non-Metallic Mineral products x)
Basic Metals. Alloys &
Metal Products xi)
Machinery & Machine tools
xii) Transport
Equipment & parts |
The
classification of ‘manufactured products’ is similar to the classification
adopted in the Index of Industrial Production (IIP) except that the sub group of
‘Other Manufacturing ‘ has not been retained and its traded value has
been imputed in to remaining sub-groups.
8)
Methodology of Index Calculation
Actual
index compilation is done in stages, though due to computerization now, the
machines do all complex calculations. In the first stage, once the price data
are scrutinized, price relative for each price quote is calculated. Price
relative is calculated as the ratio of the current price to the base price
multiplied by 100 i.e. (P1/Po)X100. Assigning weights at
quotations level is difficult, as it needs detailed data.
In
the next stage, commodity/item level index is arrived at as the simple
arithmetic average of the price relatives of all the varieties (each quote)
included under that commodity. An average of price ratio/ relative is used under
implicit assumption that each price quotation collected for an item/commodity
index compilation has equal importance i.e. the shares of production value is
equal. Where as if the ratio of
average prices is adopted instead, the implicit assumption would be that
importance of each price quotation depends on its price level in the base period
and all the quantities produced are equal. Since quantities produced at unit
level are not equal the average of price relatives method is preferred to arrive
at item level index in WPI.
Next,
the indices for the sub groups/groups/ major groups are compiled and the
aggregation method is based on Laspeyres formula as below:
I=
S (Ii x Wi) / S Wi
Where,
I
= Index numbers of wholesale prices of a sub- group/group/ major group/
all commodities
S
= represents the summation operation,
Ii
= Index of the ith item / sub- group/ group/ major group.
Wi
= Weight assigned to the ith item of sub- group/group/ major group.
The
weights are value weights. Aggregation is first done at sub-group and group
level. All commodities index is compiled by aggregating Major group indices.
9)
Handling of the Seasonal Commodities
:
There
are number of agriculture items, especially some fruits and vegetables, which
are of seasonal nature. When a particular seasonal item disappears from the
market and its prices are not available because of its being out of season, the
weights of such item is imputed amongst the other items on pro rata basis with
in the sub-group of vegetables or fruits. The underlying assumption is that if
the items remained available, the prices of these items would have moved in the
same proportion as the prices of the other items in the sub-group, which did
remain available. This is equivalent to giving a greater weight to the remaining
items. The seasonality problem can be sorted by adopting other methods like, i)
prices of unavailable items can also be extrapolated forward from the period of
availability or ii) if such seasonal item has insignificant weight it can be
taken permanently from the basket etc.
10)
Procedure for Estimation for Non-response and Data Substitution
As
the series grow older, many of the items in the basket tend to disappear from
the market, or item specification may change or the source agency may no longer
manufacture the item.
a)
If the source agency stops manufacturing and the item is still available
in the market, then efforts are made to locate and fix another representative
source producing item with matching specification.
b)
In case no suitable substitute is available, the weight of the item is
imputed to similar other item or among other items of the sub-group/group. The
criterion for imputation is that the price movement of the outgoing item and the
item to which weight is imputed is similar. Imputation of weight is not a
long-term solution and ultimately replacement has to be effected.
c)
In case item with different specifications need to be taken in the basket
as a substitute then the new price and old price is linked by splicing.
Substitution
and replacement:
First of all it should be ensured that the prices of both the price quotations,
outgoing quotation (old price) and incoming quotation (new price) are collected
concurrently for some time and respective price movements observed for any
extreme variation. Splicing is done by working out a ratio (linking coefficient)
of concurrent price quotations and multiplied by the base price as below:
Price
of New Quotation (Incoming Price)
-----------------------------------------------------X
Base Price of the item
Price
of old quotation (Outgoing Price)
Price
relatives are worked out by dividing the current price with the updated base
price. Splicing can be done other way round, wherein, linking coefficient can be
worked out by dividing old price (outgoing quote) with the new price (incoming
quote) and multiplied by the current price.
In
WPI the substitution is effected from the date final indices are compiled. The
effective date and the splicing ratio are documented properly.
11)
Provisional Vs Final:
Primary
objective of WPI is to bring out an estimate of headline inflation for the
economy. Because of late receipt of price data, part of the price data cannot be
utilized as the WPI is released on weekly basis. The weekly indices are compiled
after a short gap of two weeks only as compared to other indices, which are
compiled on monthly basis. The WPI are, therefore released provisionally and
final revised indices, incorporating all possible quotations, are released after
a gap of two months.
12)
Data collection mechanism
:
At
present data collection for WPI is solely based on voluntary basis. Price data
pertaining to ‘Primary articles’ and ‘Fuel & petroleum products’ are
mainly collected through administrative Ministries/Departments, PSUs and state
government Departments. For ‘Manufactured products’, apart from some
government sources, data collection is done through Chambers of Commerce, Trade
Associations, Business Houses and leading Manufacturing Units.
13)
Linking Factor:
In
order to maintain continuity, the time series data on wholesale price index, it
is important to provide linking factor so that new series when released may be
compared with the outgoing one. It
provides a basis for determination of cost escalation and wage settlement and
secondly, generates a long time series data for analytical purposes.
There
are three commonly used methods for linking new series with old one i.e (i)
arithmetic conversion method (ii) ratio method and (iii) regression method. In
arithmetic linking method the relationship between the indices in the old series
(y) and those in the new series (x)
is assumed to be linear i.e y
= cx, where c is the conversion
factor given by
The
linking factor for the WPI, which has been published officially, has been based
on arithmetic conversion method. The
linking factor is worked out only at aggregate level for all commodities.
Because of the vast changes in the commodity baskets, it has not been found
feasible to compile linking factor at group/ sub-group level. Even though for
analytical purpose, it would be very useful to have linking factor at
desegregated level.
15)
Data
Management and Dissemination System
The
ultimate use of the index compilation will depend upon the quality of data
management and data dissemination. Though due to improved computer facilities it
has now become easier to compile, store and transmit WPI data. As SDDS norms of
IMF are applicable to WPI, every effort is made to ensure timeliness and
transparency in release of the indices. Weekly WPI are released to the press on
every Friday. Dissemination of Weekly press release is also done through
official website simultaneously. Time series data are also made available to
users through print and electronic media on request. Report of the last Working
Group is also placed on the office website i.e. http://www.eaindustry.nic.in/