How Producer Price Index will help measure India's inflation
What's the story
India is set to launch its first-ever Producer Price Index (PPI) to measure inflation. The PPI, which will be unveiled by the Ministry of Commerce and Industry today, is a major step toward aligning India's inflation measurement with advanced economies. It will complement the existing Wholesale Price Index (WPI), which only tracks wholesale prices of goods. The new index will cover both goods and services, including India's services sector that accounts for 55% of the country's gross domestic product (GDP).
Data modernization
Efforts to modernize official statistics in India
The introduction of the PPI is part of a larger effort to modernize official statistics in India. Earlier this year, the government had released new series for retail inflation and GDP, as existing measures were based on outdated benchmarks. The new dataset may be welcomed by investors, economists, and rating agencies seeking more detailed inflation data.
Economic implications
PPI as warning signal for policymakers
Economists believe that while the PPI may not have an immediate impact on monetary policy, it could help track inflation pressures earlier in the supply chain. Debopam Chaudhuri, Chief Economist at Piramal Group, said, "PPI is a stronger warning signal for policymakers." With this new index, policymakers will get information ahead of time to better manage retail inflation.
Data accuracy
Enhancing accuracy of India's growth data
The introduction of the PPI could also enhance the accuracy of India's growth data. Chaudhuri said it brings India "one more step closer" to using appropriate tools for adjusting GDP data for inflation, giving policymakers a clearer picture of economic activity. Sachchidanand Shukla, Group Chief Economist at Larsen & Toubro, said this new index would give the Reserve Bank of India "a more complete view of cost pressures compared to WPI."