Indian Economic Service
Indian Statistical Service Examination, 2023
“Exclusion of service sector in W.P.I. is a major constraint in reflecting consumer inflation in India.” Comment.
An important indicator of inflation in India is the Wholesale Price Index (WPI). It focuses primarily on tracking the changes in the prices of goods at the wholesale level, meaning it monitors price fluctuations of goods sold between businesses or at intermediate stages of production.
However, it excludes the service sector, which can indeed be considered a major constraint when it comes to reflecting consumer inflation in India. This issue can be explained in more detail here:
Composition of the WPI:
As a result of the WPI, the prices of raw materials, manufactured products, and agricultural commodities are primarily tracked. Compared to the Consumer Price Index (CPI), which includes a broad basket of goods and services that are consumed by households directly, the Consumer Price Index (CPI) includes a wider basket of goods and services.
However, the WPI does not directly capture consumers’ costs of living, despite the fact that it is useful for assessing inflationary pressures within the production and manufacturing sectors.
Changing Consumption Patterns:
There has been a significant shift in consumer preferences and consumption patterns in India over the years. The economy has evolved from being predominantly agrarian and manufacturing-based to becoming increasingly service-oriented.
There is a substantial portion of household expenditures dedicated to health, education, transportation, and communication. These services are not adequately included in the WPI, which is primarily based on goods.
Consumer Price Inflation vs. Wholesale Price Inflation:
As goods move from manufacturers to retailers to consumers, various markups, taxes, and distribution costs are not included in the WPI since it focuses on wholesale prices. As a result, the CPI is a more accurate measure of consumer inflation because it directly measures the final prices consumers pay, including all associated costs.
Considering that the service sector is excluded from the WPI, it can offer an inaccurate picture of overall inflation. Even if the prices of goods in the WPI basket remain relatively stable, if service prices are rising rapidly, this can significantly impact the cost of living. Consumers may experience true inflationary pressures understated by the WPI due to this disconnect.
Inflation data can play a significant role in monetary policy decisions, such as setting interest rates. In order to formulate their policies, central banks like the Reserve Bank of India (RBI) use CPI data as a primary measure of consumer inflation. When services are excluded from the WPI, policy actions can diverge from actual economic conditions.
In order to obtain a more comprehensive view of inflation, the Indian government has used the Consumer Price Index for Industrial Workers (CPI-IW) and the Consumer Price Index for Rural Laborers (CPI-RL) in conjunction with the WPI.
Therefore, when it comes to reflecting consumer inflation in India, the exclusion of the service sector from the Wholesale Price Index is indeed an important constraint. In order to get a better picture of inflation’s impact on Indian citizens, policymakers and economists use the Consumer Price Index (CPI), which includes a wider range of goods and services consumed directly by households. Despite its value for monitoring producer inflation, the WPI is less relevant when assessing consumer cost of living.