The Working Group for the Revision of Index Numbers of Wholesale Prices in India was constituted under the chairmanship of Prof. Y.K. Alagh, the then Vice-Chancellor, Jawaharlal Nehru University on 18 June 1993. Prof. S. R. Hashim took over the chairmanship since September, 1996 consequent upon Prof. Alagh taking over as Minister of State (Independent charge) in the Government of India. The Working Group was entrusted with the task of examining the issues relating to the choice of the base year, selection of commodities, preparation of weighting diagram and several other aspects of the Wholesale Price Index series and making recommendations for the introduction of the revised series. The Working Group thoroughly examined the existing series of index numbers of wholesale prices in all respects. It deliberated on each and every aspect of the index in depth and dealt extensively with the overall status of the index.

The Working Group held eleven meetings prior to formulating its recommendations. The details of the recommendations of the Working Group on the choice of the base year, selection of items and their specifications, market centres, weighting diagram, collection and scrutiny of price data etc. are summarised in what follows.

Going by the well known criteria that the Base Year being chosen have the desired properties of being (i) a normal year i.e., a year in which there are no abnormalities in the levels of production and trade and in the price levels and price variations, (ii) a year for which reliable price and other required data are available and (iii) a year as recent as possible, the Working Group decided to have ‘1993-94’ as the ‘base year’ for the new series of Wholesale Price Index Numbers.

With a view to reflecting adequately the changes that have taken place in the structure of the economy, almost all the important items being transacted in the economy have been included in the revised index. The choice of commodities, varieties/grades, market centres and sources of price data in respect of agricultural commodities has been made as per the recommendations of the Sub-Group on Agricultural Items. The selection of varieties, markets etc. in respect of commercial crops like tea, coffee, jute, cotton, raw tobacco, raw silk and raw rubber has been done in consultation with the Tea Board, Coffee Board, Directorate of Jute Development of India, Cotton Corporation of India, Directorate of Tobacco Development, Rubber Board and Silk Board respectively.

For deciding on the inclusion of the mineral items, their grades, market centres, etc., the working Group has gone by the suggestions of the Indian Bureau of Mines. The Department of Coal have suggested the specifications to be selected for coal, coke and lignite and the Ministry of Petroleum and Natural Gas, for crude petroleum and other petroleum products. In respect of electricity, the suggestions on this aspect have come from the Central Electricity Authority.

As regard the selection of items under ‘manufactured products’, the Working Group has, in principle, gone by the criterion of value of trade. All the items having a value of trade of Rs.120 crore or more as per the Annual Survey of Industries (ASI), 1993-94 have been included in the new series. In view of the fact that many items have substantial imports, the Working Group also decided to include all such items where the value of output plus net imports exceeded Rs. 120 crore. The Sub-group on Manufactured Products and the Sub-group on Unorganised and Unregistered Industries together identified the list.

A few of the items selected on the basis of the above criteria have, however, had to be dropped due to difficulties in getting their price data. Many of these items are not manufactured according to any standard specifications; rather, these are fabricated according to the customer’s requirements which vary from one customer to another and from one point of time to another. In respect of others, there are difficulties in identifying sources that could be expected to supply price data on a regular basis in the long run.

The selected items in the ‘Textiles’ group have, however, not been adopted as per their nomenclature/classification in the ASI. In this case, the selection of items has been done on the advice of the Office of Textile Commissioner which happens to be the major user of the wholesale price index for textile items. The suggestions of the Office of Textile Commissioner are in keeping with the practical utility of the items to the textile industry and trade as also the feasibility of collecting price data from various sources.

The selection of specifications in respect of manufactured products as also the selection of sources for supplying price data has been done from out of the top 10 manufacturers producing a particular item. At least 5 price quotations in respect of representative grades have been included in the index. In certain cases where it has not been possible to ensure a minimum of 5 price quotations, either because of the nature of the product or due to certain other reasons, as many price quotations as possible have been included.

The new series with 1993-94 as the base has as many as 435 items in the commodity basket. In the revised series, "Primary articles" contribute 98 items, "Fuel, Power, Light and Lubricants" 19 items, and "Manufactured Products" provide 318 items. The number of price quotations in the revised series is spread out to as many as 1918 quotations. The average number of price quotations per item works out to 4.4 for the revised series.

A comparison of the number of items and price quotations (at the level of major groups) in the previous, the existing as well as in the revised base series is presented in Table 1.

It could be seen from the above table that out of three major groups only Primary Articles show an increase in the number of items in the revised series. Fuel, Power, Light and Lubricants and Manufactured Products have not expanded in respect of number of items. Within Primary Articles, the group "food articles" show a marginal increase while the other two groups "non-food articles" and "minerals" recorded a decline. The entire list of selected items & their specifications, market centres and price reporting agencies is presented in Annexure-IV.

The composition of the series has been rationalised by incorporating newly emerging and important items, deletion of unimportant items, amalgamation of less important items with similar ones and splitting of certain items into a number of items.

In all, 136 distinctly new items have been added in the revised series. Besides, a number of varieties/grades, which are merely quotations of some item in the current series without having any weight have been upgraded to the level of a commodity in the new series. Again, a few items of the current series have been amalgamated because of their similarity in characteristics and for making their description more purposeful. As many as 150 items figuring in the 1981-82 series have been dropped due to their insignificant contribution in terms of their relative value of production in the economy.

The group-wise specific details of these newly added items, dropped items, sub divided items and merged items are presented in chapter-5.

For preparation of the weighting diagram, the methodology adopted in the current series has been followed for the proposed series also. The weights of the items are based on the value of transactions which consist of (a) value of estimated marketed surplus in the case of agricultural commodities and value of products for sale in the case of non-agricultural products, (b) total value of imports, including import duties, and (c) total value of excise duty. Weights have been assigned on the basis of the entire wholesale transaction in the economy. The value of transactions of non-selected commodities has been assigned to the selected items on a pro rata basis.

Within the agricultural sector, individual commodities have been assigned weights on the basis of the average value of production during the triennium ending 1994-95. The revised series has utilised the estimated marketed surplus ratios pertaining to the base year a practice that was started from the present series as proposed by the preceding Working Group.

In the ‘Minerals’ group, the allocation of weights to individual commodities is based on the average value of production during the year 1993-94. In the case of major groups ‘Manufactured Products’ and ‘Fuel, Power, Light and Lubricants’, however, the value of production as per the ASI, 1993-94 has been used along with figures on foreign trade. In case of the group "other miscellaneous manufactures", which is dropped, its weight is distributed pro rata among other groups within the major group.

Table 2 presents a comparative picture of the weighting diagrams of the previous, the existing and the revised series, at the level of major groups.

It may be observed from the above table that the weight of ‘Primary Articles’ has significantly declined while that of ‘Manufactured Products’ has gone up considerably in the revised series. This situation has arisen as a consequence of the relatively slower growth in the agricultural sector, particularly ‘food articles’ and ‘non-food articles’ in the major group Primary Articles. The new weighting diagram is thus in conformity with the structural changes that have taken place in the economy since the introduction of the current series.

The revised series, like the existing series, is based on ex-factory/ex-mine prices in respect of the manufactured items. In the case of agricultural commodities, however, the prices as quoted in primary markets are used. The possibility of replacing ex-factory price with the wholesale price was fully explored but in the light of available facts and figures, it has been decided to continue using the ex-factory prices (inclusive of excise duty) wherever wholesale prices are not available. It is worth mentioning that even the developed countries like the U.S.A. and Japan use a mixture of wholesale and ex-factory prices in their price index compilation.

There is no change in the system of collection of price data which is mostly through correspondence. While that is the practice for the collection of weekly data, for index compilation, data for the base year and past data of the subsequent years were not all available through correspondence. A few officers from the Secretariat had to sojourn from time to time to fill various data gaps.

Besides the points discussed above, there are several other aspects of the index which are also quite important. These, inter alia, include handling of seasonal items, classificatory system, formula for computing the index, linking of the old and the new series and the finalisation of the index.

There are a number of agricultural commodities, especially some fruits and vegetables which are of seasonal nature. Such seasonal items are handled in the index in a special manner. When a particular seasonal item disappears from the market and its prices are not quoted, the index of such an item ceases to get compiled and its weight is distributed over the remaining items in the concerned sup-group, on a pro-rata basis.

The National Industrial Classification (NIC) being generally followed in the current series in respect of manufactured products has been retained for the revised series also. This has been done with a view to maintaining continuity and to facilitate linking of the revised series with the current one. It should, in any case, be possible to rearrange the classificatory system to meet one’s requirements.

There is no change in the method of compilation of the index in the new series. It is calculated 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.

Because of the late receipt of a few returns, the weekly index of wholesale prices at the time of its initial compilation is provisional. In such cases, the prices of the missing quotations are either repeated or estimated, depending on the nature of the commodity. The provisional index is made final after a period of eight weeks by which time almost all the required price data are expected to have become available. In case some price returns are received late by more than eight weeks, the same would be used only with effect from the week for which the index is being finalised in the current week and no index finalised earlier would get modified.

In order to maintain continuity in the index series, it is imperative to provide a linking factor so that the new series may be compared with the outgoing one. The linking of the two series is significant on two counts. Firstly, it provides a basis for determination of cost escalation, wage settlement etc. and secondly, it generates a long duration time series information which can be used for conducting certain analytical studies on the behavior of prices.

There are generally three different methods used for linking a new series with an old one. These are: (1) arithmetic conversion method, (2) ratio method and (3) regression method. Of the three methods, the arithmetic conversion method is the simplest and operationally the most convenient one. The office of the Economic Adviser has been using this method to link various series. The choice of linking method is, however, left to be decided by the users. In this report, linking factors have been used at the "All Commodities" level, at the major group level and the group level separately.

The National Informatics Centre (NIC) and Working Group Division of the Office of Economic Adviser have been working in a cohesive manner for the successful release of the forthcoming Wholesale Price Index Series. The smooth transition from series 1981-82 to the new series 1993-94, has been mainly due to the sustained and devoted efforts of National Informatics Centre. The techno-functional support from NIC helped in the efficient implementation of the new series. For this purpose, many software modules were developed by NIC. It facilitated in focusing attention towards the scrutiny of raw price data & its consistency check, generation of reports required for decision making and index generation. Basic technical methodology for compilation of WPI remained the same as for the current series. Necessary changes have also been incorporated in the software to take stock of rare situations that may creep in the seasonal items. It is also proposed to make the revised series data available on the WEB site of the Office of Economic Adviser, Ministry of Industry from the first release of the revised WPI series.

A comparative analysis of the general wholesale price index of the revised series and the existing series, shifted to base 1993-94 shows that the revised series starts off from a level higher than the old series from the year 1994-95 and thereafter the two series more in consonance with each other. In fact the rate of change in the revised series after 1994-95 is slightly lower than in the old series as the commodity composition of the revised series reflects better quality products sometimes a little higher in absolute price level.

The Working Group constituted a sub-group to consider various conceptual and analytical issues that are constantly encountered both at the conceptual level for revision of the series and issues in the choice of data for compilation on a continuous basis. The report of the Sub-group on Analytical Issues was considered by the Working Group and a number of issues emerged.

While there is no change in the operational content of the concept of wholesale prices, it was clarified that the price quotations pertained to bulk transactions, generally at an early stage of trading. It was also found that "wholesale price" data are frequently collected, where unavoidable, from a variety of sources such as ex-farm, ex-factory gate, ex-mine level and could be either with-transportation cost or without. They are sometimes akin to producer prices, but by no means always or even generally so. In fact, it is felt that in future a good part of manufactured products’ prices would have to be collected from traded data rather than the more commonly used company cost/price data. In several cases, retail prices are used or those for which one-off deals take place.

The wholesale price is the base weighted Lespeyre’s index and the weights need to be changed from time to time so that the sample does not get too much out of line with the underlying characteristics of the economy. Unbiasedness of the sample is also maintained if the weights are not correlated with their associated prices. It is contended that the underlying economy has been moving out of line with its base year at a much faster rate than in the past, driven mainly by quantum leaps in technological changes. In this situation the weights get distorted faster. Moreover, there is greater integration with the world economy and changes which take place therein add steam to the changes which are purely domestic in character. Several technological changes are such that price changes and market penetration of their products are highly correlated. All these factors impart considerable weight to the argument for changing the weighting diagram more frequently. It is recommended that serious consideration may be given to the possibility of changing the base year perhaps twice as frequently as normally done now. It is also feasible to undertake such an exercise in view of the rapid strides which have taken place in information technology for data compilation and transmission.

The working Group recommends that a Standing Committee be set up immediately with the dual task of being an advisory body to the Secretariat on a continuous basis and the initiation of new indices which have been recommended for the future.

Despite conceptual difficulties and definition of the range of services to be included, it was agreed in principle that there is scope for including a whole array of them in the measure. In this context another conceptual difficulty was clarified in that the WPI purports to measure the value of money in terms of other things. Thus there is scope for including them in the index. In this context, it is recalled that the hallmark of the concept of wholesale prices, though frequently equated with bulk transactions, is its reliability and relative stability in space and time. What is more, the same criterion is used in the compilation of the WPI series with the commodities-only basket where a number of quotations do not pertain either to wholesale trade or even bulk transactions. In the event, the Working Group recommends that a serious attempt be made to start compilation of this new segment which occupies nearly one half of income generated in the economy. Two related matters are also recommended. Initially, the effort should begin with a restricted number of relatively important service industries for which reliable data are available. Secondly, the constructed indices should be kept in isolation from the mainstream WPI and checked for their relative stability and robustness. When these are established, a new series combining the commodities and services may be brought out. A number of sectors for the initial efforts have been identified.

It has been found that a number of products change their quality characteristics over time and the evolution of their price history reveals the combined contribution of quality changes and pure price changes. The Working Group has accepted the position that so far as the weighting diagram is concerned, commodities are identified by their functional characteristics only. A binary choice criterion has conceptually emerged which corresponds well with the practice adopted. Thus marginal changes in quality is ignored, but a significant change leads to the identification of a new item in the basket.

The measure as it is followed so far is somewhat unsatisfactory because the WPI that is being presented here in reality is a modified and (service) pruned version of what can be termed as "producers’ price index". However, the same index is being passed off for a whole host of other measures which the WPI as constructed now is not meant to represent. It is neither a measure of the composite price of transactions in the economy because it is not inclusive enough nor that of the inflation rate in the economy. As far as the inflation measure is concerned, it is necessary that the proper weighting diagram ought to exclude inter-industry transactions that permeate economic activity but which are not central to the measurement of the final price of goods and services in the system. There is no point in including these if the objective is to measure the prices of the commodities in the vector of final demand. It is hoped that a meaningful index could be constructed as a separate measure of inflation. It is pertinent to note that the proposed index in this context is not a substitute for the retail price index at the national level, although it may move in sympathy with that. It will, however, be close to the implicit GNP deflator.