Producer Price Index (PPI)

6th July, 2024 Economy

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Context:

The Department for Promotion of Industry and Internal Trade (DPIIT) in India is progressing towards introducing a Producer Price Index (PPI) that could potentially replace the existing Wholesale Price Index (WPI).
This move aligns with international standards and aims to better reflect economic activity.

READ ABOUT: Wholesale Price Index (WPI): https://www.iasgyan.in/daily-current-affairs/wpi

What is PPI?

Purpose and Scope: PPI measures wholesale prices from the perspective of goods and services producers. It tracks price changes at various stages of production, offering insights into inflation trends affecting producers directly.
International Alignment: PPI is widely adopted globally, as it conforms to the System of National Accounts (SNA) recommended by international bodies like the International Monetary Fund (IMF).

Producer Price Index (PPI)

What is the Producer Price Index (PPI)?

Definition: The Producer Price Index (PPI) tracks price fluctuations throughout the production process. It measures the average change in selling prices received by producers for goods and services.
Coverage: PPI monitors price changes for goods and services sold to both final consumers (end-users) and intermediate consumers (used further in production).
Purpose: PPI serves as an inflation indicator, focusing on price increases at the producer level before they affect consumers. It excludes factors like indirect taxes, transport costs, and trade margins.

Need for Producer Price Index (PPI)

Tracking Inflation: PPI provides a gauge of wholesale price changes, essential for tracking inflationary trends.
Economic Activity: Rising PPI indicates increased production activity, while falling PPI suggests reduced production.
Business Use: Businesses use PPI data to determine pricing strategies for their products and services.
Government Policy: Governments utilize PPI insights to formulate economic policies and make informed decisions.

Example of Producer Price Index (PPI)

Illustration: For instance, PPI could monitor price variations in agricultural commodities like wheat, rice, or cotton. It measures the average prices received by agricultural producers over a specified period, offering insights into inflation trends within the agricultural sector.

Current Status and Future Plans

Consultations and Model Finalization:

DPIIT has conducted consultations with the Ministry of Statistics and Programme Implementation (MOSPI).
The model for PPI is finalized, incorporating methodology advised by the IMF.
Procedural clearances are underway, though a specific timeline for implementation isn't disclosed yet.

Transition from WPI to PPI:

DPIIT indicated that while WPI might eventually be replaced by PPI, the decision is still in the consultation phase.
A transitional period is anticipated where both indices, WPI and PPI, will co-exist.

Conclusion

The introduction of PPI in India marks a significant step towards aligning with global standards in economic measurement.
It aims to provide a more accurate reflection of price movements in the production sector, potentially replacing the older WPI over time pending further consultations and approvals.

PRACTICE QUESTION

Q. Discuss the significance of Performance Price Index (PPI) as a tool for measuring economic efficiency and its relevance in the context of India's development trajectory. How can PPI contribute to enhancing economic policymaking and monitoring in the country? Explain with suitable examples.

SOURCE: BUSINESS STANDARD

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Producer Price Index (PPI)