For the input-price measure, the Ministry of Statistics and Programme Implementation (Mospi) is using data from the Annual Survey of Industries (ASI) along with item-level output Producer Price Indices (PPI), instead of relying on a separate conventional index for input prices or an input PPI.
“The double deflation has been carried out using elementary item-level output Producer Price Indices (PPI) based on the ex-factory price for manufactured products, released by the Office of Economic Advisor, Department of Industry and Internal Trade, ministry of commerce and industry,” Mospi said on Monday in a detailed explanation on the sources and methods for compilation of national accounts statistics.
This comes amid an ongoing debate over the deflator used to calculate real manufacturing gross value added (GVA), particularly because India’s PPI is still released only on an experimental basis by the Ministry of Commerce and Industry.
Under double deflation, the value of goods produced by manufacturers and the cost of inputs used to make those goods are adjusted separately for price changes. This is different from using a single price index to convert nominal manufacturing GVA into real GVA.
The ministry’s reasoning is that the output PPI is not limited to finished goods but already contains intermediate products.
“The output PPI includes final goods, and intermediate goods (i.e. goods which are further used in production process) such as wheat, milk, bauxite, coking coal, electricity, palm oil refined, gram flour (besan), cotton yarn, sacks/ gunny bags for packing of goods, leather crome/ wet blue, tanned, naphtha, phosphoric acid, cement, semi-finished products of iron and non-alloy steel, etc. are available in the output PPI,” the document noted.
On this basis, one industry’s output price can serve as another industry’s input price.
The new approach is considerably more granular than applying a single aggregate index. Mospi said that items accounting for 80 per cent of the total output and input, in value terms, are selected after being ranked by value. The current-price value of each item is then split according to its ASI-derived weight and deflated using the corresponding elementary Output PPI. This is done separately for output and inputs.
Two of thirty manufacturing categories — processed food and oils (NIC 101-104) and pharmaceuticals (NIC 21) — are excluded from double deflation because “share of imported input is high and direct mapping of input items with the elementary item-level output PPI is challenging.”
For services used as inputs, where no producer price index exists, the ministry falls back on consumer prices and implicit deflators.
Further, the new series revises the treatment of defined-benefit pensions by estimating the present value of pension entitlements accruing to serving government employees, rather than using pension payments to retirees as a proxy.
