The Office of the Economic Adviser to the Government of India undertook to publish for the first time, an index number of wholesale prices, with base week ended August 19, 1939 = 100, from the week commencing January 10, 1942. The index was calculated as the geometric mean of the price relatives of 23 commodities classified into four groups : (1) food & tobacco; (2) agricultural commodities; (3) raw materials; and (4) manufactured articles. Each item was assigned equal weight and for each item, there was a single price quotation. That was a modest beginning to what became an important weekly activity for the monitoring and management of the Indian economy and a benchmark for business transactions.

3.2 A new ‘food articles’ index was prepared in 1945 having a wider coverage, with the last week of August, 1939 as the base. This index was calculated as a weighted geometric mean of price relatives, the weights being proportional to the values of marketable surplus of the various commodities during 1938-39. The base period of the index was subsequently shifted to the year ending August, 1939. Subsequently, the scope of ‘food articles’ group was expanded to cover other groups besides food articles. Since 1947, the Office of the Economic Adviser started publishing, regularly every week, a series of weighted index number of wholesale prices with the year ended August, 1939 as the base period. This series included as many as 78 commodities, covering 215 individual quotations, classified into five groups : (1) Food articles; (2) Industrial raw materials; (3) Semi-manufactures; (4) Manufactures; and (5) Miscellaneous. The index was a weighted geometric mean of price relatives. The series lasted till March, 1956.

3.3 The pre-Independence period WPI indices naturally represented undivided India making it necessary to revise the index soon after Independence. In accordance with the recommendations of the Standing Committee of the Departmental Statisticians, the Economic Adviser’s Office issued a revised series of index, with 1952-53 as price base and 1948-49 as weight base, consisting of 112 commodities, and 555 individual quotations. The commodities were classified into five groups: (1) Food Articles; (2) Liquor & Tobacco; (3) Fuel, Power, Light & Lubricants; (4) Industrial Raw Materials; and (5) Manufactures. Cereals were covered comprehensively on the basis of the markets specified by the Agricultural Prices Enquiry Committee. As regards other agricultural commodities, markets were chosen in consultation with the Ministry of Agriculture. Non-agricultural commodities were selected on the basis of the availability of price data at producing and consuming centers. Markets were selected on the basis of the suggestions given by state governments and various organizations like the chambers of commerce and trade associations. The weighted arithmetic average was adopted in preference to the weighted geometric mean used for the earlier series. This series was issued regularly every week from April, 1956 to September, 1969.

3.4 While the 1952-53 series (with 1948-49 weight base) comprehensively covered agricultural commodities, the coverage of non-agricultural commodities was becoming increasingly inadequate. With a view to removing this deficiency, the Government of India constituted a committee for improving the coverage and mode of collection of price quotations of non-agricultural commodities. On the basis of the recommendations made by this committee, a new series of index numbers of wholesale prices with base 1961-62 = 100 was issued from July, 1969. This series lasted till December, 1976. It covered 139 commodities and 774 quotations. In the matter of commodity classification the ‘Standard International Trade Classification’ (SITC) with slight alterations made to fit in with the Indian conditions was followed. Accordingly, commodities were classified into seven groups : (1) Food Articles; (2) Liquor & Tobacco; (3) Fuel, Power, Light and Lubricants; (4) Industrial Raw Materials; (5) Chemicals; (6) Machinery & Transport Equipment and (7) Manufactures.

3.5 While introducing the series with base 1961-62, it was decided to constitute a working group to go into the methodological aspects of the index relating to the revised series, with a more recent year as the base. Accordingly, a new series, with the base year as 1970-71, was introduced in January, 1977 on the recommendations of the Working Group on Revision of Index Numbers of Wholesale Prices. The coverage of this series was much wider as it included 360 items and 1295 price quotations.

3.6 The selection of items to be included in this series was based on systematic criteria. As regards the non-agricultural items, those with a total value of production of more than one crore of rupees each according to the Annual Survey of Industries, 1965, and also items whose indigenous outputs were small but imports were substantial, were generally included, subject to the availability of price data. In the case of agricultural sector, selection of commodities was done in consultation with the Directorate of Economics & Statistics, Ministry of Agriculture. These were significant steps in the evolution of a scientific method of index number compilation.

3.7 In all the previous series, the weighting system was based on the value of transactions of only those commodities which featured in the index. In the 1970-71 series, weights were assigned on the basis of the entire wholesale transactions in the economy and, for this purpose, the values of transactions of the non-selected commodities (which did not find place in the index) were assigned to those selected commodities whose nature and price trends were similar. This was an important modification in arriving at a more representative sample of weights for the WPI. Another improvement introduced was in the system of allocation of weights to the individual commodities. As far as possible, all identifiable items which were treated as quotations (without a separate weight) in the earlier series were treated as separate commodities and weights were assigned to all of them.

3.8 The weights in this series (base 1970-71) were based on the value of transaction consisting of : (a) Value of marketable surplus in the case of agricultural commodities and value of products for sale in the case of manufactured products, (b) total value of imports, including import duties, if any, and (c) total value of excise duty, if applicable. In the agricultural sector, individual commodities were assigned weights in proportion to the average value of marketable surplus during the three year period ending 1969-70, worked out on the basis of available data. In the ‘minerals’ and ‘fuel, power, light and lubricants’ groups also, the allocation of weights to individual commodities was generally based on the average value of production in the three year period ending 1969-70. In the case of ‘Manufactured Products", however, the value of production based on the ASI-1968 data was used for deriving the weighting pattern.

3.9 In the 1970-71 series, the ‘National Industrial Classification’ (NIC) was adopted to bring about a greater uniformity with the classification followed in some other important indices like the Index of Agricultural Production, Index of Industrial Production, etc. In this classification, all the commodities whether domestically produced or imported and available for sale in primary markets were grouped under three major groups, viz.,

A: Primary Articles.

B: Fuel, Power, Light & Lubricants, and

3.10 The major group ‘Primary Articles’ comprised three groups, vis, (I) Food Articles, (ii) Non-Food Articles and (iii) Minerals.

3.11 The major group ‘Fuel, Power, Light and Lubricants’ in the 1970-71 series consisted of coal, coke, lignite, mineral oils and electricity.

3.12 The major group ‘Manufactured Products’ contained eleven groups, viz., (1) Food Products, (2) Beverages, Tobacco and Tobacco products, (3) Textiles, (4) Paper and paper products, (5) Leather & Leather products, (6) Rubber and Rubber products, (7) Chemicals and Chemical products, (8) Non-Metallic Mineral products, (9) Basic Metals, Alloys and Metal products (10) Machinery and Transport Equipment and (11) Miscellaneous products.

3.13 The Wholesale Price Index Series underwent another restructuring in terms of its base and weighting diagram from the beginning of 1989. For this purpose, the choice of the base year was narrowed down to that between 1978-79 and 1981-82, and the latter year was chosen as the appropriate base. It was perceived to be so on three major counts viz., (a) it was a normal year in terms of price and production data; (b) it was closer to the actual data period of the 1990s; and, (c) it was close to the base year of other revised index series commonly in use for economic decision making.

3.14 The new series with 1981-82 as the base year continued the conceptual tradition that has been followed by its predecessors. However, some significant innovations were made in the attempt to restructure the series; they also related to the breadth of coverage of commodities and composition of groups of commodities. As against 360 items in the 1970-71 series, the 1981-82 series included 447 distinct commodities. The commodity coverage in terms of the total number of items thus increased by a total of 87. This was the net result of the addition of 75 new items, the splitting of a group of 32 items of the earlier series into 100 distinct items and the amalgamation of 4 of the then existing items into 2 of the new series; in view of the structural changes, 54 items were deleted from the 1970-71 series for the compilation of the new series. The number of price quotations increased from 1295 of the earlier series to 2371 in the revised series. The new series represented the underlying economic activity more accurately and adequately, presumably in a more representative manner.

3.15 For the preparation of the weighting diagram, weights were assigned on the basis of the value of wholesale transactions for the economy. Each selected item was allocated a weight that is proportional to its share in the total value of output in the economy. The value of output of the non-selected items was distributed to those of the selected ones whose nature and price trends were considered similar.

3.16 Within the agricultural sector, individual commodities were assigned weights on the basis of the average value of marketed/marketable surplus through the triennium ending 1981-82. The 1981-82 series utilised as an innovation the marketed surplus ratios pertaining to the base year as against the marketable surplus ratios based on the surveys conducted in 1950s and early 1960s for the series it replaced. In addition, the revised series mostly used the marketed surplus ratios instead of marketable surplus ratios; the weight of opinion is overwhelmingly in favour of using the first concept in preference to the second one. For manufactured products, the value of production as per the ASI, 1980-81 have been used in the compilation of weights. A distinct improvement in the 1981-82 series was the inclusion of the value of output of the unorganized/unregistered manufacturing sectors for assigning weights to various products. Even though it is argued that price trends in the two segments of manufacturing industry tend to move in tandem, the unassigned weights belonging to the unorganized/unregistered sector could impart a significant downward bias to the share of manufacturing output in the total economy. This possible source of correction has been reflected in the weighting diagram that has ultimately emerged in the 1981-82 series as compared with its predecessor.

3.17 The manufactured products were classified by the same National Industrial Classification (NIC) as had been done earlier. This had facilitated an undisturbed comparison with the past while moving commodities and groups of commodities to the appropriate class where such a move was warranted. Overall, the complete list of 447 commodities of the 1981-82 base was split into three major sectors of the economy : (I) Primary Articles; (II) Fuel, Power, Light and Lubricants; and, (III) Manufactured Products.

3.18 The Primary Articles sector was further split into (i) Food Articles (ii) Non-food Articles and (iii) Minerals. The Manufactured Products sector has been sub-divided into 13 sectors, two more in number than in the preceding series. These were (1) Food products; (2) Beverages, tobacco and tobacco products; (3) Textiles; (4) Food and food products; (5) Paper and paper products; (6) Leather and leather products; (7) Rubber and rubber products; (8) Chemicals and chemical products; (9) Non-metallic mineral products; (10) Basic metals, alloys and metal products; (11) Machinery and machine tools; (12) Transport equipment and parts; and (13) Other miscellaneous manufacturing industries. In all, there were 334 items in the Manufactured Products list, 20 items in the Fuel, Power, Light and Lubricants list and 93 items in the primary articles list, altogether adding up to 447 for the 1981-82 base.

3.19 There was no change in the method of compilation in the 1981-82 series from what has been followed in the past. It was calculated on the principle of weighted arithmetic mean and using the Laspeyre’s formula, which has a fixed base-year weighting diagram operative through the entire life span of the series.

3.20 An important advance made in the last Working Group report was with respect to the mode of compilation of the weekly price index. It made a major break from the traditional manual method by using desktop calculators to the use of high speed computers with the assistance of the National Informatics Center (NIC), which developed a comprehensive software package custom-made for this purpose. This has allowed for considerable advance in terms of scope, coverage, accuracy and the potential for further analysis and research on both the price series and a wide variety of analytical studies based on rich information contained in the time series data.

3.21 In the revision that is carried out for the new base year 1993-94 and contained in this Report, a number of significant changes have been proposed. A number of issues which are analytical in character are discussed in chapter 7. It is contended that a good part of the economic activity that is classified as services could and ought to be incorporated in the price indices, as the services sector of activity now accounts for nearly one-half of the Indian economy and is buoyant in comparison with the commodity producing parts of the economy. Similarly, it is observed that while the WPI measure captures the exchange value of money in relation to other things, it is, arguably, not the most appropriate instrument for the measurement of inflation in the economy. The Working Group felt that a more appropriate index could be devised in alternative ways. Apart from the exclusion of services sectors, the WPI measure captures the value of gross transactions in the economy. It is neither a producers’ nor a consumers’ basket for the measurement of inflation . However, it has for long been taken as an index of change in the value of money for the economy as a whole with a history connecting upto the late 1930’s. Hence for the sake of continuity and as a useful reference point, the construction of the WPI measure has been left undisturbed, despite the above misgivings, and updated with a new weighting diagram and base year of 1993-94.

3.22 The proposed WPI series follows the current series in most practical ways for data compilation. It is divided into three major sectors of "primary articles", "fuel, power, light and lubricants" and "manufactured products". In case of "manufactured products" the classification that was used in the 1981-82 series has been retained, but the last category, "other miscellaneous manufactures" has been dropped due to problems encountered in representativeness of individual items in its fold, and its weight has been distributed across other remaining categories of manufactured products on a pro-rata basis. There are thus 12 categories of manufactured products in the 1993-94 series which are identical with the first 12 categories of the 1981-82 series as listed above. There are altogether 435 articles/items in the new series, comprising of 98 primary articles 19 items of " fuel, power, light and lubricants" and 318 manufactured items, making up the sample basket of the 1993-94 Wholesale Price Index series.