Ramesh Chand Panel To Advise On Resetting Inflation Index For Better GDP Estimation

(MENAFN- Live Mint) New Delhi: The government on Thursday set up a committee of experts to reset the base year of the current series of Wholesale Price Index (WPI) in an effort to make the measure of factory-gate inflation more accurate. This, in turn, will make India's estimation of economic output adjusted for inflation more precise.

An official statement issued by the commerce and industry ministry said the 18-member panel led by NITI Aayog member Ramesh Chand will advise on a proposal to change the base year of WPI from 2011-12 to 2022-23 reflecting the structural changes in the economy over the years.

Also read |
How well does the cost inflation index reflect actual inflation rates?

The government also signalled its intention to transition from WPI, which covers goods but not services, to a more comprehensive producer price index (PPI) that can track services. which account for more than half of India's economic output.

Updating the base year of WPI will make estimation of price changes at the level of producers more accurate and enhance the accuracy of GDP deflator used in computing GDP in real terms, a person informed about the development said on condition of not being named.

Closer to reality

This is expected to make estimation of real GDP more close to reality. Moving from WPI to a producer price index is also expected to help in this regard. Real GDP measures a country's economic output, adjusted to remove the effects of price changes.

Separately, government efforts are on to revise the base year for GDP estimation from 2011-12 to 2022-23. The last such revision was done in 2015 when the base year was updated from 2004-05.

The proposal for a producer price index was earlier made by the late Chairman of Economic Advisory Council to the PM, Bibek Debroy. Debroy's recommendation was that there was a need to look at the deflators used in the calculation of national income at constant prices as some of the deflators may not be comprehensive. Mint reported on 23 January 2024 that the Prime Minister's Office (PMO) was taking stock of India's statistical system.

Also read |
How well does the cost inflation index reflect actual inflation rates?

The move to make the macroeconomic data set more current and robust comes in the context of India's growing contribution to regional economic growth as well as differences in opinion expressed by various economists about the robustness of the statistical system.

Experts welcomed the move to revamp WPI index.

“The critical part of this announcement relates to the construction of a PPI series for India. India has lagged many other countries who have already launched their PPI series. WPI suffers from many deficiencies. In particular, it pertains only to goods that are domestically produced. It excludes the service sector and exports and imports of goods and services,” explained DK Srivastava, Chief Policy Advisor at EY India.

Impact of changes

WPI contains impact of changes in some indirect taxes while CPI also contains the impact of indirect taxes upto the retail level. It is better to construct an index of price changes that reflects costs faced by producers where the tax load has been excluded as far as possible, said Srivastava.“PPI along with the consumer price index (CPI) would provide better determinants of the movement in the national income deflator. It will bring India in line with international national income accounting practices,” said Srivastava.

The working group would do well not only to construct a PPI with 2022-23 as the base year but also take this series backwards for a better analysis and understanding of the trends in the national income deflator in India in
recent
past, added Srivastava.

Also read | Tax dept issues new cost inflation index

The panel has 18 months to give its report. The panel has to review the existing system of price collection and suggest changes for improvement, decide on the way to compute WPI/PPI and suggest any other improvements needed for enhancing the reliability of WPI/PPI, said the official statement.

The panel comprises SBI Group chief economist Soumya Kanti Ghosh, Surjit Bhalla, member of Economic Advisory Council to Prime Minister Shamika Ravi, Crisil chief economist Dharmakirti Joshi, Kotak Mahindra Asset Management MD Nilesh Shah and Bank of America Merrill Lynch co-head and economist Indranil Sengupta in addition to officials from different ministries and the Reserve Bank of India.

MENAFN02012025007365015876ID1109049323