CHAPTER 39
PRICES
In India, inflation has always been one of the most closely monitored macroeconomic
indicators. The inflationary trends highlight the need to have an appropriate price index.
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 (WPI) or at the
level of the retail end of marketing channel or Consumer Price (CPI). The retail price is
defined as money cost to the consumer of a specified unit of sale which is inclusive of all
taxes but excludes all rebates, discount etc.
Recently the Central Statistics Office (CSO) released a new series of consumer price
indices for all-India and states and Union Territories, separately for rural, urban and
combined. The Office of the Economic Advisor (OEA), Ministry of Commerce and Industry,
has been Publishing the Index Number of W holesale Prices with effect from January 10,
1942 onwards. A new series of WPI was launched in September, 2010 with the base year
2004-05.
Wholesale Price Index (WPI)
Wholesale Price represents bulk transactions generally at the early stage of trading. The
price pertaining to bulk transactions may have divergent nomenclatures e.g. farm harvest
prices, wholesale prices, procurement prices, support prices, administered prices, import
prices, forward prices etc. W holesale price Index relates to the transactions at the primary
stage which broadly correspond to producer prices. The Office of the Economic Advisor
(OEA), Ministry of Commerce and Industry, has been Publishing the Index Number of
Wholesale Prices with effect from January 10, 1942 onwards. The present data pertains to
the Index Numbers of Wholesale Prices in India with base 1993-94=100. This series was
introduced with effect from 1st April, 2000. The WPI commodity basket has three
constituent commodity groups (a) primary articles, (b) fuel, power, light, and lubricants and
(c) manufactured products, with respective weights of 22.02 percent, 14.23 percent and
63.75 percent. The (1993-94) series has 435 items for which there are 1918 quotations.
All items having large transactions in the economy have been included in this series to the
extent feasible.
A new WPI series with 2004-05 base was released on 14 September 2010. The new
series is an improved version of the old series with base 1993-94. In the new series, a
representative commodity basket comprising 676 items has been selected and weighting
diagram derived for the new series. The total number of price quotations has also
increased from 1918 in the old series to 5482 in the new series, indicating better
representation of the prices in the wholesale markets. Sector-wise price quotations have
increased form the old to new series from 455 to 579 in primary group and from 1391 to
4831 in the manufactured products group. The weights of the constituent commodity
groups in the new series are primary articles 20.12%, fuel, power, light, and lubricants
14.91% and manufactured products 64, 97%.
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Some of the important items included in the new series basket are flowers , lemons,
and crude petroleum in primary articles and ice cream, canned meat, palm oil,
readymade/instant food powder, mineral water, computer stationery, leather products,
scooter/motorcycle tiers, polymers, petrochemical intermediates, granite, marble, gold and
silver, construction machinery, refrigerators, ovens, communication equipment(telephone
instruments), TV sets, VCDs, washing machines, and auto parts in manufactured products.
The collection of price data is mostly through correspondence. Some of the important
sources for collection of price data are as follows.
(i) Directorate of Economics and Statistics, Ministry of Agriculture
(ii) Agricultural marketing Departments of central and State Governments
(iii) State Directorates of Economics and Statistics
(iv) District Statistical Offices
(v) Registrar of Cooperative Societies and other primary agencies belonging to the
State Government
(vi) The Non-Govt Office’s sources are the various Chambers of Commerce Trade
Associations, leading manufacturers and business houses.
Index is compiled on the principle of weighted arithmetic mean according to the Laspeyre’s
formula, which has fixed base year weights operating through the entire life span of the
series.
Change in Reporting of Inflation
At present the WPI for all commodities including manufactured products is released only on
a monthly basis. However, until recently WPI for primacy articles and the fuel group was
also being released on a weekly basis. This practice was interred to help in analyzing the
trends for policy-making as these commodities are essential in nature. But it was observed
over a period of time that there was a tendency for upward revisions in the indices reported
once the final numbers were later released. The higher frequency weekly reporting was thus
prone to more statistical ‘noise’ and sometimes provided a misleading picture. So the trade-
off was between the more frequent and less reliable data and less frequent but more
reliable data. International practice for reporting CPI inflation is also on a monthly basis.
In view of this, the Cabinet Committee on Economic Affairs (CCEA) in its meeting held on
24 January 2012 agreed to discontinue the weekly release of WPI for the commodities/item
under the groups “primary articles” and “fuel and power” with immediate effect. The last
weekly WPI for the week ending 14 January 2012 was released on 27 January 2012 WPI
shall, henceforth, be released on a monthly basis only.
Main Drivers of Headline WPI Inflation
Looking at the weighted contribution of major product groups of WPI inflation, it can be seen
that the contribution of primary articles has significantly declined from about 46 per cent in
2010-11 (April-January) to 28 per cent in 2011-12 (April-January) On the other hand, that of
manufactured products has gone up from 35 per cent in 2010-11 to about 49 per cent in
2011-12. The contribution of fuel has remained relatively stable at around 19 per cent in
2010-11 and 23 per cent in 2011.
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International food inflation was also well above domestic food inflation and started
accelerating from near zero per cent in June 2010 to about 42 per cent in June 2011:
thereafter it stabilized and turned negative in December 2011. However, domestic food
inflation remained relatively flat in the last one year, before dropping recently. The food price
index (base 2002-04 = 100) of the Food and Agriculture Organization (FAO), which touched
an all-time high of 238 in February 2011, has since declined to 214 in January 2012. This
has been facilitated by a slowdown in demand besides improvement in global supply of
agricultural commodities. Nevertheless, price levels and volatility continue to remain a
cause for concern and are expected to continue to be impacted globally by incomes,
diversification of dietary patterns, attraction of bio-fuels as alternative sources of energy,
and weather disturbances.
As a consequence of these developments during the year 2011-12 inflationary pressures
were witnessed particularly in the EDEs even though the outlook for global growth remained
weak. However, the renewed sluggishness in the global economy has led to some
moderation in commodity prices- particularly those of metals. Overall, going forward global
commodity prices are expected to decline in 2012 as per World Bank projections, due to
slowdown in demand and improved supply prospects.
Fuel was another contributory factor behind high headline inflation in the last two years. The
sharp rise and volatility of prices of oil and petroleum products in international markets has
becomes a matter of global concern. Crude oil prices remained volatile during financial year
2011-12 due to political upheaval in the major oil-exporting countries coupled with
increasing uncertainly in the global economic environment. Crude oil prices have steadily
been increasing since December 2008. International crude oil (Brent) prices have moved up
very sharply from US $ 75 per barrel to over US $ 114 per barrel in June 2011, a 52 per
cent year-on-year increase.
Global prices of crude oil and petroleum products play a decisive role in the domestic
pricing of petroleum products since more than 75 per cent of the country’s crude oil
requirement is met through imports. Therefore the price of crude oil and petroleum products
in the international oil markets has considerable impact on domestic prices of petroleum
products. With the dismantling of administered petrol prices (with effect from 26 June 2010),
prices of petrol have risen by 12.46 per cent, during 2011-12 (April-December) from Rs.
58.37 per liter (April 2011) to Rs. 65.64 per liter (December 2011).
Consumer Price Index (CPI)
Consumer Price Indices (CPI) measure changes over time in general level of prices of
goods and services that households acquire for the purpose of consumption. CPI numbers
are widely used as a macroeconomic indicator of inflation, as a tool by governments and
central banks for inflation targeting and for monitoring price stability, and as deflators in the
national accounts. CPI is also used for indexing dearness allowance to employees for
increase in prices. CPI is therefore considered as one of the most important economic
indicators.
CPI numbers presently compiled and released at national level reflect the fluctuations in
retail prices pertaining to specific segments of population in the country viz. industrial
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workers, agricultural labourers and rural labourers. These indices do not encompass all the
segments of the population in the country and as such do not reflect true picture of the
price behavior in the country. The new series of CPI for the entire urban population, viz.
CPI (Urban), and CPI for the entire rural population, viz. CPI (Rural), reflects the changes
in the price levels of various goods and services consumed by the urban and rural
population. These new indices are compiled at State/UT and all-India levels. For
construction of CPI numbers, two requisite components are weighting diagrams
(consumption patterns) and price data collected at regular intervals.
Weighting Diagram
Weighting diagram gives the share of each item considered in the total consumption
expenditure. The weighting diagrams for the new CPI series have been derived on the
basis of average monthly consumer expenditure of an urban/rural household obtained from
the NSS 61st round Consumer Expenditure Survey data (2004-05). Only consumption
expenditure has been considered for the purpose of preparation of weighting diagrams.
Non-consumption expenditure has been excluded.
After exclusion of non-consumption expenditure from the average monthly consumption
expenditure, the remaining items were classified into several consumption groups and
subgroups considering Classification of Individual Consumption according to Purpose
(COICOP), the standard international classification as well as present classification of
items adopted in the existing CPI numbers compiled at national level. The grouping
followed is (1) Food, beverages and tobacco, (2) Fuel and light(3) Housing (4) Clothing.
Criteria of Selection of Items
Multiple norms were adopted for selecting the items depending on their importance, their
popularity and suitability for pricing on a continuing basis.
Accordingly, following four-fold criteria were adopted
:
(i) to include all PDS items;
(ii) to include all items accounting for 1% or more of total expenditure at sub-group
level;
(iii) to include all items accounting for more than specified percentage of total
expenditure of all consumption items: Food, Housing & Miscellaneous >
0.04%,Fuel > 0.03%,Clothing > 0.02%
(iv) to include all items for which more than 75% households have reported
consumption.
All items satisfying any of the above four conditions were retained. These are termed as
weighted items. Expenditure on certain item was imputed considering its insignificant
share and/or difficulties involved in pricing to the item(s) retained on the basis of mainly
same or similar price movements. All India weights of CPI (Rural), CPI (Urban) and CPI
(Combined) are as under:
Price Collection in Urban and Rural Areas
Number of price schedules (quotations) that could be canvassed by the field investigators
available was fixed around 1100.These quotations were distributed to States/UTs on the
basis of urban population (Population Census 2001). For regular price collection by NSSO
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(FOD)/Specified State Governments, all cities/towns having population (2001 Population
Census) more than 9 lakh and all state/UT capitals not covered therein were selected
purposively. In the selected towns, market survey was undertaken by NSSO (FOD) for (i)
identification of popular markets (ii) selection of shops/outlets for different commodities in
the selected markets and (iii) determination of specifications of commodities to be priced.
Rented dwellings, from which house rent data are to be collected, were also identified in all
the selected towns during the market survey. Prices are collected by the NSSO (FOD)
every month.
For compilation of house rent index, rent data are also collected from sample rented
dwellings in each of the selected town. In case of concessional or subsidized dwellings,
the rent actually paid by the family for the dwelling along with any allowance foregone in
lieu of the accommodation given to him/her is taken as rent payable per month. Fare Price
Shop prices, are also collected for Rice – PDS, Wheat/ wheat- atta – PDS, Sugar-PDS and
Kerosene- PDS in respect of Above Poverty Line (APL) and Below Poverty Line (BPL)
households.
CPI (Rural) provides the price changes for the entire rural population of the country and
therefore a total of 1181 villages have been selected at all India level. These villages have
been distributed more or less equally among the four weeks to take in to account weekly
variations in the prices.
Data from different locations are uploaded through a web portal developed by
NIC.Compilation of CPI numbers generally consists of two stages i.e. (i) calculation of
price indices for elementary aggregates (item level indices) and (ii) the aggregation of
these elementary price indices to higher level indices using the weights associated with
each level. Laspeyres formula is used for aggregation of indices. Specifications of items
have been selected on the basis of popularity in the respective areas. These specifications
are different in terms of units, quality etc for different price schedules. Prices relative of
each product specification (current month price/base year average price) is worked out.
Average of these price relatives under the respective item multiplied with 100 gives the
index for that item. In case of seasonal items of vegetables and fruits, whenever prices of
these items are not reported in a particular month, weights of such items are imputed on
pro-rata basis to the items in the respective section (root vegetables, fresh vegetables,
fresh fruits, and dry fruits). House rent index is compiled in a different way. Two categories
of dwellings viz. rented dwellings and self-owned dwellings are considered in the
compilation of the house rent index. The rental equivalence approach is adopted in respect
of self owned dwellings. For each State/UT, six months data (January to June or July to
December) are used to compile rent relatives. Rent relative is calculated as current month
rent/rent six months ago and then simple average relative is worked out by classifying the
dwellings by number of living rooms (1 room, 2 rooms, three rooms and four or more
rooms). These rent relatives are weighted to get a combined rent relative using the
estimated proportions of dwellings under each group, obtained from the NSS 58th round
survey on Housing Conditions (July-December 2002). Chain base method is adopted in
the compilation of house rent index and these indices are repeated for the subsequent six
months period. That is, indices compiled using the data of January to June are repeated
for the period July to December. For the period January-June 2011, house rent is taken as
100, as previous six months period is a part of the base year 2010.
For PDS items, price relatives are worked out separately for Above Poverty Line (APL) and
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Below Poverty Line (BPL) categories. These price relatives are combined with the
respective share of expenditure as obtained from the Consumer Expenditure Survey
(2004-05).
Revised CPI (UNME), 2010
The Consumer Price Index for Urban Non-Manual Employees [CPI (UNME)] numbers on base 1984-
85=100 in respect of 59 urban centers and all -India were earlier compiled and released by the Central
Statistical Organisation, Ministry of Statistics and Programme Implementation. Because of outdated
base year and also deployment of field investigators for collection of price data for a broad based CPI
(Urban) number, the National Statistical Commission in its meeting held on 15.2.2008 decided to:
(i) Discontinue the CPI (UNME) and
(ii) Adopt link index, based on ratio method after aggregating the sub group level indices of Labour
Bureau’s CPI (Industrial Workers) using CPI (UNME) weights at group/sub-group level for all India.
(iii) Compile linked CPI(UNME) numbers till new series of CPI(Urban) is brought out
2. Based on the methodology given by National Statistical Commission, ratio of CPI (UNME)
numbers to CPI (Industrial Workers) numbers for each of the 24 months for the two year period from
January, 2006, December, 2007 at sub-group level has been worked out. Average ratio at each level
based on 24 months figure is taken as the linking factor at the respective level. The CPI (UNME)
weights have been used to get the indices at group and all groups levels.
3. Price collection for CPI (UNME) was discontinued with effect from April 2008.
The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation has
introduced a new series of Consumer Price Indices (CPI) on base 2010=100 for all-India and
States/UTs separately for rural, urban and combined with effect from January, 2011.
Industrial Workers
The Labour Bureau, an attached office of the M/o Labour & Employment, has been
compiling and disseminating Consumer Price Index for Industrial workers since its
inception in the year 1946 .Consumer Price Index Numbers for Industrial workers measure
a change over time in prices of a fixed basket of goods and services consumed by
Industrial Workers. These index numbers are utilized for regulation of wages and dearness
allowances of millions of employees and workers in the organized sector. It also serves as
an indicator of retail prices in the country and is used for measuring inflation rates,
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formulation of wages and interest policies The Labour Bureau, an attached office of the
M/o Labour & Employment, has been compiling and disseminating Consumer Price Index
for Industrial workers since its inception in the year 1946.
This index series till 2005 was based on 1982=100. A new series on base: 2001=100 has
been released w.e.f. January, 2006 in respect of 78 important centers in which workers
belonging to 7 sectors viz. factories, Mines, Plantations, Railways, Public Motor transport
Undertakings Electricity Generating and Distributing Establishments and Ports & Docks.
The data on Consumer Expenditure have been obtained from an ad-hoc survey “ Family
Income and Expenditure Survey” conducted during September 1999 to August 2000 in
respect of 78 selected centers by the NSSO on behalf of Labour Bureau. The survey was
conducted over a period of 12 months in each selected centre. These 78 centres were
selected on the basis of their industrial importance in the country and distributed among
different states in proportion to the Industrial employment in the State subject to a
maximum allotment of 5 centers per state per sector. On the basis of the results thrown up
by the survey, the weighing diagrams have been derived in respect of 78 constituent’s
centers and All -India. The indices are compiled by using price data collected on monthly
basis and house rent survey data on half yearly basis. The CPI (IW ), numbers at centre
and all India levels are released every month (the last working day of the following
months).
Agricultural and Rural Labourers
Consumer Price Index Numbers for Agricultural and Rural labourers are compiled on the
basis of the weights derived from consumer expenditure data collected during NSS 38th
round in 1983 and the prices are collected by NSSO(FOD) on monthly basis. The CPI-
AL/RL is compiled for 20 States. The index of each State covers 85 to 106 items, from a
fixed sample 600 villages spread over 66 zones.
Highlights:
• Year-on-year WPI inflation after remaining persistently high over the past two Years
has started to show signs of moderation lately. Financial year 2011-12 started with a
headline inflation of 9.7 per cent, which briefly touched double digits in September
2011 before coming down to 6.6 per cent in January 2012.
• WPI inflation remained relatively sticky at around 9 per cent during the calendar year
2011. The factors contributing to this situation and their relative importance have
however, been changing over time.
• Inflation in primary articles has declined drastically, falling to 2.25 per cent by
January, 2012 after remaining in double digits for almost two years. However,
inflation in fuel has continued to remain high during the last two years. Inflation in
manufactured products has started to accelerate since January 2011, remaining
range-bound between 7 and 8 per cent in 2011 due to surge in metal and chemical
prices, but it has also recently started to moderate.
• Whole Sale Price Index had a long-run average of around 5 per cent in early 2011-
12. Among individual product groups. Inflation in food products, beverages, textiles,
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chemicals, and basic metals remained elevated mainly on account of high global
commodity prices and cost push pressures.
• During 2011-12 the W PI for all commodities was 156.13, which was 9.1% more than
the WPI of 2010-11, which was 143.32. The increase in the price indices was most
prominent in case of primary articles (9.8%) followed by increase in the price indices
fuel and power 14%. The increase in the price indices of manufacture product was
only 7.3%.
• The W PI (base 2004-05) rose of 8.5% in 2006-07 over the previous year. In 2007-
08 it rose by 4.7% which was a moderate increase, but it again increased by 8% in
2008-09. In 2009-10 it rose by a modest 3.8% before rising by a 9.5% in 2010-11.
• In 2011-12, among the commodities group “Primary Articles”, the price index for
food articles increased by 9 . 8 %, while the price index for non - food articles
increased. by 9 . 6 % and Mineral increased by 26.6%.
• General Consumer price index numbers for Agriculture Labourers and Rural
Labourers (1986-87=100) rose by 8.9% in 2010-11 over 2009-10 and 7.8% of 2010-11 over
2011-12. Increase in Consumer Price Index for Rural Labourers is almost same.
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PRICES
Table 39.1(A)
INDEX NUMBERS OF WHOLESALE PRICES IN INDIA BY
MAJOR GROUPS, GROUPS AND SUB‐GROUPS
(Base:2004‐05=100)
160.00 All Commodities
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12(P)
Weight of Commodities
Primary
Articles
Manufactured 20%
Products
65%
Fuel and
Power
15%
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