Posts Tagged ‘index of industrial production’

PRICE INDEX “The Score Card”

The price index is an indicator of the average price movement over time of a fixed basket of goods and services. The objective is to monitor & measure the retail, wholesale or producer prices etc.

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Base Year for calculation: Presently WPI series compiled are — Assam (base 1993-94), Bihar (1991-92), Haryana (1980-81), Karnataka (1981-82), Punjab (1979-82), U.P.(1970- 71) and West Bengal (1980-81). The National Statistical Commission has recommended that base year should be revised every five year and not later than ten years. Step-wise introduction to compilation of WPI: Like most of the price indices, WPI is based on “Laspeyres formula” for reason of practical convenience. These steps are discussed in detail in the following sections:

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1) Concept of Wholesale Prices: It is the rate at which relatively large transaction of purchase, usually for further sale, is effected. The price pertaining to bulk transaction of agricultural commodities may be farm harvest prices, or prices at the village mandi /market of the Agricultural Marketing Produce Committee/ procurement prices, support prices.

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2) Choice of Base Year: The criteria for the selection of base year are (i) a normal year i.e. a year in which there are no abnormalities in the level of production, trade and in the price level and price variations, (ii) a year for which reliable production, price and other required data are available and (iii) a year as recent possible and comparable with other data series at national and state level.

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3) Selection of Items, Varieties/ Grades, Markets: The importance of an item in the free market will depend on its traded value during the base year. In agriculture commodities the selection of new items in the basket is done on the basis of increased importance in wholesale markets. In the existing WPI series, items, their specifications and markets have been finalized in consultation of with the Directorate of E&S (M/O Agriculture), National Horticulture Board, Spices Board,Tea board, Coffee Board and Rubber Board, Silk Board, Directorate Of Tobacco, Cotton Corporation of India etc.

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4) Derivation of Weighting Diagram: Weights of Agriculture commodities: These weights are based on the Marketed value (MV) arrived at by multiplying Marketed Surplus Ratio (MSR) to the estimates of Value of Production (VOP) of agricultural commodities.

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5) Collection of Prices: The collection of base prices is done concurrently while the work on finalization of index basket is on. Therefore, price collection is normally done for larger number of items pending finalization. Once the basket is ready, current prices are collected only as per the final basket from the designated sources. Weekly prices need to be collected for pre-determined day of the week. For the current series prices are quoted on the basis of the prevailing prices of every Friday.

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6) Treatment of prices collected from open market & administered prices: The issue of using administered prices for index compilation is resolved by taking into account appropriate ratio between the levy and non-levy portions. Where these ratios are not available, the issues can be resolved through taking the appropriate number of price quotations of the administered prices and the open market prices after periodic review.

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7) Classification structure: The classification is based on NIC renders the WPI data amenable to comparison with the Index of Industrial Production (IIP) and National Income data.

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8) Methodology of Index Calculation: In the first stage, once the price data are scrutinized, price relative for each price quote is calculated. Price relative is calculated as the ratio of the current price to the base price multiplied by 100 i.e. (P1/Po) X100. In the next stage, commodity/item level index is arrived at as the simple arithmetic average of the price relatives of all the varieties (each quote) included under that commodity. Next, the indices for the sub groups/groups/ major groups are compiled and the aggregationmethod is based on Laspeyres formula.

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9) Provisional Vs Final: The weekly indices are compiled after a short gap of two weeks only as compared to other indices, which are compiled on monthly basis. The WPI are, therefore released provisionally and final revised indices, incorporating all possible quotations, are released after a gap of two months.

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10) Data collection mechanism : At present data collection for WPI is solely based on voluntary basis. Price data pertaining to Primary articles and Fuel & petroleum products are mainly collected through administrative Ministries/ Department’s, PSU’s and state government departments. For ‘Manufactured products’, apart from some government sources, data collection is done through Chambers of Commerce, Trade Associations, Business Houses and leading Manufacturing Units.

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Govt all set to introduce a new IIP in about 4 months :)

indian industry

As the government is expected to introduce a new index of industrial production (IIP) in around 4 months, the benchmark for measuring industrial production in India is all set to change.

🙂

However, the new index will use 2004-05 as the base year of calculation instead of 1993-94.

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The number of commodities will go up to around 850, from 543 whereas nearly 30% of the existing commodities will be swapped by new ones.

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It’ll certainly be a much more recent picture, no question about it.

As in recent times, the product composition has changed dramatically, so both the widening and the deepening of the economy will be reflected.

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Moreover, the weight assigned to different product groups as part of the final index will also change since they are presently incompatible with the changes in production patterns.

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Such as, mobile phones are not included in the index while LCDs are not included in television sales.

Moreover, the weightage given to autos is well below their importance in the economy.

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However, it is said that the weightages will change in order to fix these like the weight for basic goods will rise by 5% points while that for capital goods will rise by 5.7% points.

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Morever, the intermediate goods will see the biggest hit, losing 7.7% points and consumer durables will increase in weight while consumer non durables will be lighter by 5% points.

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Change in weights of different commodity groups:

Change in weights of different commodity groups

Similarly, electricity will rise by close to 2% points but manufacturing will take a hit of over 7.5% points.

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The new IIP index will definitely give us a better idea of the kind of changes industrial production has undergone in the past decade.

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However, collection of the base data in time would pose as a major challenge for the government as different departments are responsible for collecting the data.

In recent times, collecting data from the manufacturing sector, is already turning out to be a problem as companies aren’t responding fast enough.

😦

🙂