The changes in prices, both absolute and relative, influence a wide range of economic activities, and a constant watch on prices becomes necessary for the operation and regulation of current economic policies as well as for the purposes of planning and policy formulation. The changes in prices over a period of time can be gauged by the statistical device of index number of prices. The price index can be either at the wholesale level or at the level of the retail end of the marketing channel. The Wholesale Price Index is important, as it helps in understanding the movement of prices relating to bulk transactions of purchases, usually for further sale. Conventionally, the wholesale price index has been used to measure the variations in exchange value or purchasing power of money. It has also been utilized for other purposes like forecasting changes in business conditions indicating supply-demand relationships, deflating aggregates such as national income, etc. The index numbers are available at the sector and sub-sector levels as well as at the overall level of the economy.

2.2 At present, a number of departments of the Government of India, semi-government bodies, chambers of commerce, trade associations and private concerns are using the index numbers of wholesale prices extensively. Use of index numbers of wholesale prices for a particular period is also made while entering into a contract for the supply of raw materials, machinery etc. The weekly index number of wholesale prices has now acquired immense importance, since this is the only index which gives an idea of the week-to-week fluctuations in the prices of all the traded commodities in the country as a whole. During inflationary periods, the Government keeps a close watch on the behaviour of prices with a view to taking appropriate corrective steps. The Reserve Bank of India and the Government of India also frame their monetary and fiscal policies in the light of the price trends, which are reflected by the index numbers of wholesale prices. Other organizations like the Planning Commission, Department of Civil Supplies, Central Statistical Organization, etc., base their various schemes on the price trends revealed by the index numbers of wholesale prices.

2.3 Some of the units in public and private sectors are using the indices for the purpose of escalation clause in the supply of raw materials, machinery and construction work. It has been further observed that the costs of certain projects are estimated on the basis of index number of wholesale prices. As the Indian market economy matures further, the indices are expected to be used more intensively for entering into contracts between the government, as regulator, and business. A greater part of economic infrastructure would be built by private investment and regulated through broad policy guidelines and the use of the indices would provide an objective benchmark for reference. Similarly, various professionally managed utilities in the public and private sectors could use the indices for contract between different parties and between purveyors and users of services. Furthermore, as business organisations are restructured with transactions between various segments and types of activities conducted at arm’s length to harness the benefits of new technological developments, the wholesale price index could provide an objective benchmark for comparison between various vertical and horizontal segments of activity. All these have begun, but are expected to gain momentum as business activities are autonomously managed and conducted.

2.4 A number of controls in the management of the economy have been eased already and it seems that the unfinished agenda of monetary policy reforms would ease such controls further. As these changes occur, monetary management of the economy by the RBI would lean more and more on instrument controls to deliver the desired objectives. "Monetary targeting" has been traditionally the preferred method of monetary policy in all major economies. However, analytical thinking on the matter has shifted base and a range of other options are being actively considered or are in use, particularly instruments such as inflation targeting and interest rate targeting. Sometimes a battery of instruments are also used to supplement the major approach, as it is being done in India. Whatever may be the instruments in use from time to time it is imperative that inflation measurement by means of a well-chosen sample basket of commodities becomes an essential ingredient to its efficacy.

2.5 However, as mentioned in Chapter-1 and further discussed in Chapter-7, the concept of wholesale price as represented by the WPI measure is not wholly satisfactory. The traditional WPI is important in so far as it provides an economy wide measure at the level of overall transactions in the economy with money as its numeraire. The traditional measure also provides the only link going back to the late 1930s. Thus it is quite handy for purposes of comparisons. It is also available on a weekly basis with a short lapse of time. But its major drawback is its non-specific nature for use by various agencies. It is not a proper measure for measuring inflation in the basket of final use commodities, nor does it include the range of services which cater to both businesses and consumers and have come to assume the dominant part of national expenditure. Thus while the users of this index series are many and varied, they all tend to use a series which is not designed with their specific requirements in mind. Ideally, the instrument should fit the objective and it is hoped that such a choice will be available in the not-too-distant future. The merit of this ‘index’ is that it represents the wholesale trade transactions of all the commodities produced and traded in the system and is available on a weekly basis with the least time lag relative to other price indices.