India Launches Producer Price Index to Enhance Inflation Measurement

India is set to launch a Producer Price Index for the first time, a step toward aligning with most advanced economies, giving policymakers a broader measure of inflation that captures price pressures across both goods and services in the world’s fastest-growing major economy.

The new index, to be unveiled by the Ministry of Commerce and Industry Tuesday, will sit alongside the Wholesale Price Index, which is India’s longstanding measure of producer-level inflation. While the WPI tracks wholesale goods prices, the PPI will capture prices received by producers of both goods and services, extending coverage to a sector that generates about 55% of India’s gross domestic product.

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India’s adoption of a PPI — already followed by major economies such as the US, UK and Japan — forms part of a broader effort to modernize official statistics. The government earlier this year introduced new series for retail inflation and gross domestic product, after concerns that existing measures, based on outdated benchmarks, no longer fully reflected the economy’s changing structure.

The new dataset may be welcomed by investors, economists and rating agencies looking for more granular inflation data.

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Economists see little immediate implication for monetary policy, but say the new gauge could provide an earlier read on inflation pressures by tracking price changes before they reach consumers.

“PPI is a stronger warning signal for policymakers,” said Debopam Chaudhuri, chief economist, Piramal Group. As PPI is introduced, policymakers will be “getting information ahead of time and do have much longer runway to better manage retail inflation.”

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The introduction of the PPI could make India’s growth data more accurate. Chaudhuri said the index moves the country “one more step closer” to using the right tools to remove the effects of inflation from GDP data, helping policymakers get a clearer picture of underlying economic activity.

Sachchidanand Shukla, group chief economist at Larsen & Toubro Ltd. said the data can give the Reserve Bank of India “a more complete view of cost pressures compared to WPI.” It would also help policymakers distinguish between supply-side shocks and demand-driven inflation more effectively, Shukla added.