Finance ministry asks ministries to move from WPI to PPI in future contracts

In a move to align with international standards, the Indian finance ministry has urged all ministries and departments to transition from the Wholesale Price Index (WPI) to the Producer Price Index (PPI) in future government procurement contracts. This shift aims to address the issue of inflation more accurately.

The Department of Expenditure, in its communication to the various ministries and departments, explained that PPI is a more globally recognized index when compared to WPI, which is currently used in government contracts to determine price escalation. This transition marks a significant step, as Commerce Ministry started releasing monthly PPI data for both goods and services from June this year.

The Department of Expenditure advised ministries and departments to adopt PPI in all price escalation clauses of future contracts once it becomes available. The price escalation clause in government contracts enables payments to be adjusted based on changes in the cost of crucial inputs, including materials, labor, and fuel, which helps distribute the impact of inflation among the government and the contractor.

The launch of monthly PPI data is in line with the practices followed by advanced economies and adheres to the recommendations made by the International Monetary Fund (IMF). The transition from WPI to PPI is crucial for India to move towards a more precise measurement of inflation.

The output (goods) PPI covers all representative goods traded in the economy, with manufactured items contributing the highest 69.93 percent to the output PPI (goods), followed by agriculture, forestry, and fishing (22.16 percent), electricity (4.49 percent), and mining and quarrying (3.42 percent). Seven services, including banking, securities transaction, insurance, pension fund management, railways, air (passenger), and telecom, were included in the first phase of Service PPI, with the remaining services to be covered in subsequent phases.