In an effort to track pure price changes in manufactured commodities without factoring in the effects of tax fluctuations, a high-level committee has proposed to do away with the excise duty component on manufactured goods while computing the wholesale price index (WPI).

WPI is the primary gauge of inflation, in which manufacturing constitutes 64.9% weight, primary articles 20.1%, and fuel and power 14.9%. The proposal is aimed at making the inflation numbers free of the changes in the duty structure announced in the budget each year. "The committee has decided to do away with the taxation component on manufactured products to avoid future problems," Saumitra Chaudhuri, Planning Commission member and head of the committee, told ET.

Under the existing regime, the excise duty on manufactured products is taken into consideration while computing WPI. The proposal will also allow the use of the index to deflate the value of output in the Index of Industrial Production (IIP) to arrive at the real rise in production. With the recommendation taking effect, the department of industrial policy and promotion will collect only the data on price from factories and not the product price plus excise duties minus the discounts, as it does at present.

As a result, only the changes in price will get reflected in the inflation data. According to Chaudhuri, the WPI is being brought closer to the Producers' Price Index (PPI), which does not include excise duin ty or VAT. "In that sense, it looks more like PPI," he said, adding that if all goes well, the recommendations would be implemented from either the next financial year or the next calendar year. Chaudhuri is also heading a committee on PPI that the government set up to get a better idea of price movements.

Headline inflation, as measured by the WPI, stood at 4.68% in February 2014 compared with 5.05% duin January and 7.28% during the corresponding month of the previous year. "There is definitely no problem if we calculate wholesale inflation by excluding the taxes on the output. The changes in the tax rate in the budget each year have an effect on inflation too," said Pronab Sen, chairman of the National Statistical Commission.

WPI may omit tax component on manufactured products
Commenting on the feasibility of bringing the revised WPI closer to PPI, Sen said that PPI excludes all form of taxes while the recommendation on WPI is to only exclude the taxes on output and not inputs. Faced with criticism over its WPI series, which was released in 2010, the government had, in April 2012, set up a committee under Chaudhuri to revise the index taking into account structural changes in the economy since 2004-05.

There were reports of error in the updated series. However, the proposal seems to have not gone down well with some economists, who feel it would not be appropriate to do away with the taxes while computing WPI. "Excluding the tax component while calculating WPI inflation does not seem appropriate as the final price paid by the producer (including excise) is what counts," said Shubhada Rao, chief economist, YES Bank.