The Finance Ministry has urged all ministries and departments to switch to Producer Price Index (PPI) for rate escalation and adjustment clauses in future government procurement contracts
NEW DELHI — The Finance Ministry has urged all ministries and departments to switch to Producer Price Index (PPI) for rate escalation and adjustment clauses in future government procurement contracts from the current method which pegs it to the Wholesale Price Index (WPI).
The commerce ministry has started issuing monthly PPI data for both goods and services since June this year to better reflect price movement at the producer level. The transition from WPI to PPI is in alignment with the global best practices adopted by advanced economies and the recommendations of the International Monetary Fund (IMF).
Availability of both the Output PPI and Input PPI gives a better understanding of the price movements of output items vis-s-vis inputs items being used in an industry. It also explains how inflation experienced by producers on input items are passed through the output being produced, according to an official statement.
"Ministries/Departments are encouraged to adopt Producer Price Index (PPI) in place of Wholesale Price Index (WPI) in all price escalation clauses of future contracts, once PPI becomes available," the Finance Ministry’s Department of Expenditure has stated in an office memorandum to all ministries.
The revised series of WPI inflation with base year 2022-23 was first released on June 15. This new base replaced the earlier series of WPI with base year 2011-12. In addition, the new series of Output Producer Price Index (OPPI), Trial Input Producer Price Index (IPPI), and Service Producer Price Index (Service PPI) of seven services including Banking, Securities Transaction, Insurance, Management of Pension Funds, Railways, Air (Passenger), and Telecom with base year 2022-23 has also be released.
Considering the wide usage of WPI in price escalation clauses, this index will be released for five years from the date of release of the revised series along with PPI and will be discontinued thereafter. This would give sufficient time to users to switch from WPI to PPI, according to the statement explained.
The Service PPIs for seven services have been compiled in the first phase based on the availability of data from administrative sources. More services are planned to be added to the basket of Service PPI in subsequent phase on the basis of availability of data.
The WPI and Output PPI are being compiled on monthly basis. The total number of items has been increased from 697 to 957 in the new WPI series. New sources of energy, such as Solar and Wind, have been added under ‘Electricity’ Group. In addition, Nuclear Electricity has been included in the basket.
Crude Petroleum and Natural Gas has been shifted from the ‘Primary Articles’ to the ‘Fuel and Power segment. This reorganization would lead to better alignment, as this group already houses other major fuels such as coal, electricity, and petroleum products, the statement said.
Improved methodology for derivation of weights, improved computation methodology and improved Method for imputing missing price data are other features incorporated in the new WPI series, the statement added.