eRT CAPITAL: Wholesale Price Index

Wholesale Price Index

Introduction and Calculation methods:

The Wholesale Price Index is the price of a representative basket of wholesale goods. Countries like Japan, Greece, Turkey and Philippines use the changes in this index to measure inflation in their economies.
The Indian WPI figure used to be released weekly on every Thursday. But since 2009, it has been made monthly. It also influences stock and fixed price markets. The Wholesale Price Index focuses on the price of goods traded between corporations. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. In India, inflation is measured by CPI (Consumer Price Index).
The wholesale price index (WPI) is based on the wholesale price of a few relevant commodities of over 240 commodities available. The commodities chosen for the calculation are based on their importance in the region and the point of time the WPI is employed. For example in India about 435 items were used for calculating the WPI in base year 1993-94 while the advanced base year 2004-05 uses 676 items. The indicator tracks the price movement of each commodity individually.
Actual index compilation is done in stages. In the first stage, once the price data is collected, price relative for each price quote is calculated. Price relative is the ratio of the current price to the base price multiplied by 100 i.e. (P1/Po)*100.
In the next stage, Based on this individual movement, the WPI is determined through the averaging principle.

Laspeyres Formula

It is the weighted arithmetic mean based on the fixed value-based weights for the base period.
Wholesale price Index = S(Ii * Wi)/SWi
Where,

S= summation

I= Index number of the group

Ii= Index of the ith item

Wi= weight assigned to the ith item in the group

Example:

For the September 2015 we can calculate WPI for cereals in the following manner:

I= ((1.79*238.3) + (1.12*216.8) + (0.1*271.9) + (0.12*254.3) + (0.12*254.3) + (0.22*249.8) + (0.02*222.9) + (0.02*326.2)) / (1.79 + 1.12 + 0.1 + 0.12 + 0.22 + 0.02 + 0.02)

I= 233.8

Analysis of WPI data:

Source : RBI Database
As shown in the figure, blue area is the inflation rate in 2014-15 and the red area shows inflation rate in 2015-16. Inflation rate has shrunk for majority of the items except for few items like non food articles and pulses etc. Wheat prices are rising because of unseasonal rains damaging the quality of harvest and the risk of draught. This might cause the condition where India would have to import it. Looking at the monthly data in the Primary Articles, it can see that inflation for the food prices is continuously decreasing since the beginning of this year. It is a high positive change in the WPI from the last year on year WPI. In non food items logs, timber and raw rubber have experienced the positive rise in the WPI change.
The Cabinet Committee on Economic Affairs (CCEA), chaired by the Prime Minister Shri Narendra Modi has given its approval for creation of buffer stock of pulses. The buffer stock will be created in current year itself. It has approved procurement of about 50,000 ton pulses from the kharif crop 2015-16 and one lakh ton out of arrivals of rabi crop of 2015-16. Procurement of pulses will be done at market prices through Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED), Small Farmers’ Agribusiness Consortium (SFAC) and any other agency as may be decided. SFAC will undertake procurement through Farmer Producer Organisations. The procurement in kharif and rabi 2015-16 will be done at market price above Minimum Support Price (MSP) out of the Price Stabilisation Fund.
The CCEA has also decided to import pulses, if necessity arises, through a public sector enterprise of Ministry of Commerce. The decision to create a buffer stock of pulses to deal with wide fluctuation in prices is an important step for checking food inflation. This will also encourage farmers to take up pulses production on a larger scale and will enable India to help achieve self-sufficiency in pulses in a few years.
Inflation had hiked for onion prices. Although onion production was sufficient, in Madhya Pradesh and Maharashtra unseasonal rains in March and April have damaged the crop.

Why CPI is rising and WPI is falling?
CPI was 6.72% in November 2015 which was 5.74% in may 2015 while CPI was -1.99% in November 2015 which was -2.2% in May 2015. So the gap of WPI-CPI has been widened from 7.94 in May 2015 to 8.71 in November 2015.
There are two reasons for this contradiction:

1. WPI index is calculated on the 2004-05 as base while CPI is calculated on the 2012 as base. WPI base year is well before the consumer’s basket of purchases changed substantially. Government increased minimum support prices for food in this duration. It has changed purchase patterns. For example, from basic staples like rice and wheat; people started buying more protein-based foods. If CPI has been changed this year to a new base, logically the same thing should have been done to WPI too.

2. The gap widening between WPI and CPI means that inefficiency is increasing in the supply chain between wholesaler and retailer. It means middlemen are making gains at the expense of the farmer, the manufacturer and the consumer.

References:

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About The Author

This report has been prepared and drafted by Siddharth Doshi and published by Aakash Raval who are pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India. The report

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Saturday, February 20, 2016

Wholesale Price Index

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