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PRICE INDICES IN INDIA

Prof. (Dr) Vandana Bhavsar


INTRODUCTION

Price Index

It is a normalized average of prices for a given


class of goods or services in a given region,
during a given interval of time

Firstly used in Great Britain in 1886

After this it was used in US in 1893

In INDIA it was used in 1942 for the first time


TYPES OF PRICE INDICES

Main types of price indices used to


measure inflation are:-

Wholesale Price Index (WPI)


Consumer Price Index (CPI)
Producer Price Index (PPI)
Cost of living Indices (COLI)
Construction Cost Indices (CCI)
HOW TO CALCULATE
GENERAL PRICE LEVEL
Suppose a consumers basket has two
commodities food & clothing.
In January 2009 their prices were Rs. 80 & Rs.
90 resp.
If prices of these commodities rise to Rs. 100 &
Rs. 99 resp. by January 2010. How much is price
rise?
For food 25% [since 100-80 = 20, 20/80*100]
For clothing 10% [since 99-90 = 9, 9/90*100]
Thus a general price rise is [25+10]/2 = 17.5%
If we now take (0.5) (25) + (0.5) (10) = 17.5%
implies that equal weights of 0.5 are assigned to
contd..

This is illogical since everyone doesnt spend


equal amount of income on two goods.
Suppose you consume 5 units of food & 2 units
of clothing at initial prices then total expenditure
would be Rs 400 + Rs 180 = Rs. 580.
So you spend 69% on food & 31% on clothing
out of total expenditure.
Thus you are more concerned with rise in prices
on food than on clothing.
To capture this relative importance of food over
clothing, weights would now be
(0.69) (25) + (0.31) (10) = 17.25 + 3.1 = 20.35%
contd.

Now if we take base year 2009, January 1 with


general price level of 100 then general price level
in 2010, January 1 is 100 + 20.35 = 120.35
Using Laspeyers Price Index

Through this method also we get same answer.


WHOLESALE PRICE INDEX

A Wholesale Price Index (WPI) is the


price of a representative basket of
wholesale goods.
Some countries use the changes in this
index to measure inflation in their
economies, in particular India.
The Indian WPI figure is released weekly
on every Thursday.
Focuses on the price of goods traded
between corporations.
contd

The wholesale price index comprises of the


following indices:

Domestic Wholesale Price Index (DWPI)

Export Price Index (EPI)

Import Price Index (IPI)

Overall Wholesale Price Index (OWPI)


WPI AS A MEASURE OF
INFLATION
WPI uses a sample set of 315 commodities
for inflation calculation
The price from wholesale market is taken
for the calculation
It has a time lag of two weeks, which
means WPI of the week two weeks back
will be available now.
WPI gives direction before the commodity
actually hits the market
ITEMS OF WPI
SETTING UP OF WPI
Finalization of the base year - Base Price index = 100
Finalization of the item basket
Finalizing Classification structure
Allocation of weights at major groups/ sub groups
Allocation of weights is done based on the traded value
of the item
Finalization of item specification and sources of collection
Collection of price
Calculation of index Laspeyres Formula (relative
method): It is given by the formula as :
SNAPSHOT
PROBLEMS WITH WPI

Wholesale markets for products like cars


may not exist

WPI doesnt take the price of services into


consideration

Some commodities may have higher


weights during a particular period and may
not be consumed during other period.
CONSUMER PRICE INDEX
[CPI]
CPI, also retail price index is a statistical
measure of a weighted average of prices of a
specified set of goods and services purchased
by consumers for household purposes.
It is a price index which tracks the prices of a
specified set of consumer goods and services,
providing a measure of inflation.
The change in the CPI is a measure of
inflation, and can be used for evaluation of
wages, salaries, pensions, or regulated or
contracted prices.
contd.

Four different types of C.P.I. In India.


CPI UNME (Urban Non-Manual Employee)
CPI AL (Agricultural Labourer)
CPI RL (Rural Labourer)
CPI IW (Industrial Worker)
While the CPI UNME series is published by the
CSO, the others are published by the Department
of Labor.
Covers poorest section of society
It shows what consumers are paying
Less closely tracked than W.P.I.
Less no. of items included
Released monthly not weekly
Too much lag in reporting it every month
contd.
The CPI is like your shopping basket. It is a selection of
goods and services which show what you spend on. Its a
nationwide aggregate.
There are two baskets, one for an urban consumer and
another for a rural consumer and then there is a
combined basket to represent both together. The idea
behind building this basket is to see how the prices of
items in it have changed over the years. This change is
shown as a percentage and is the inflation you face.
Each separate item in this basket has a value. The first
time an item is picked, its value is pegged at 100 (in this
case, the basket is valued starting in the year 2010) and
then moves according to price change every year.
For example, you know how expensive milk has become;
in two years from 2010 January to 2012 January, the
index of dairy products has moved from 100 to 122.4
(urban index).
contd.

Food, beverages and tobacco is a sub-


group, which includes products such as
fish and meat, cereals and vegetables.
Clothing, bedding and footwear is another
sub-group, which includes items like
footwear. All these together make a
complete basket.
So, the final cost of the basket depends on
the price of individual items and the space
they occupy (weightage).
contd.

It is a price index that tracks the prices of a


specified basket of consumer goods and services,
providing a measure of inflation.

If CPI is used to measure inflation , then the rate


of inflation between 2 periods , say period t and
period (t-1 ) is given by:
PRODUCER PRICE INDEX
A Producer Price Index (PPI), measures the
average change over time in the sale prices of
domestic goods and services.
WPI does not capture the price movement of
services.
E.g. the index captured the price of important
commodities such as milk from the retail
markets; not at the producer level.
PPI measures price changes from the perspective
of the seller. Sellers and purchasers prices differ
due to government subsidies, sales and excise
taxes, and distribution costs.
CONSTRUCTION COST
INDICES [CCI]
Construction Cost Index is an indicator of the
average cost movement over time of a fixed basket of
representative goods and services related to
Construction Industry.
It accurately calculates the changes in the escalation
cost.
These indices monitors variations in the overall cost
of construction for various types of projects such as
buildings, roads, bridges, railways construction,
dams, power plants mineral plants, transmission,
urban infrastructure etc
contd..

It is a business cycle showing the trend in the


cost incurred by the contractor in the
construction process
It is the monthly measure of Construction Cost
movement for the Indian Construction Industry
released by Construction Industry Development
Council [CIDC].
Identification of the base year
Identification of the item basket - Allocation of weights
at item, groups/ subgroups level
Statistical Analysis for the number evaluation
Publishing the Indices
Data management and warehousing
contd..

Laspeyres Index Formula

P = Change in cost level,


t0 = Base period (usually the first year),
tn = Period of index computation
Similar tailor made software can be developed
for Hydroelectric Projects.
COST ESCALATION
It is change in the cost/price of specific goods or
services of a given economy over a period of time.
In a project, it refers to additional amount of
money required to construct a project over and
above the original budgeted document.
It occurs when actual cost exceeds previously
estimated value.
Cost escalation is the process of determining the
percentage increase in a products cost over time.
On a large scale, cost escalation is used to
determine inflation for our nations economy.
contd..

Escalation is used to estimate the future cost of


a project or to bring historical costs to the
present.

Escalation is the provision in a cost estimate for


increases in the cost of equipment, material,
labour, etc., due to continuing price changes
over time.

Most cost estimating is done in current Rupees


and then escalated to the time when the project
will be accomplished.
CAUSES OF ESCALATION
Natural Calamities, Interest Rates, Oil Prices,
Global Commodity markets, Wars, Wage rates,
Demand & Supply.
Size of Project
Inflation
Poor Coordination on site
Expiry of bid
Transportation Problems
Suspension of works & strikes
Engineering uncertainties & exogenous delays
Failure to plan adequate manpower
Poor understanding of local labour productivity
contd

In India cost escalation formula are linked


to a system of independent cost indices that
allow the prices to be adjusted at
determined intervals.
These indices are evaluated by WPI.
These linking of formula to WPI allows
prices to be adjusted at determined
intervals thus limiting clients &
contractors risk & gives them fair &
equitable returns
CALCULATION OF ESCALATION

Price adjustment due to an increase/decrease in the


cost of construction commodity procured by the
contractor shall be paid in accordance with the
formula -
Adjustment for Labour component

VL = increase or decrease in the cost of work during the month under


construction due to change in the rate of Labour
L0 & Li = CPI for industrial workers for the state on the day 28 days
preceding the date of opening of bids & month under consideration
PL = Percentage value of commodity component of the work in the
construction as suggested by the client.
R = total value of work done during the month

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