Meaning of fiscal policy

 The fiscal policy is concerned with the raising of government revenue and incurring of
government expenditure. To generate revenue and to incur expenditure
 To generate revenue and to incur expenditure, the government frames a policy called
budgetary policy or fiscal policy. So, the fiscal policy is concerned with government
expenditure and government revenue.
 Fiscal policy has to decide on the size and pattern of flow of expenditure from the
government to the economy and from the economy back to the government.
In broad term fiscal policy refers to "that segment of national economic policy which is
primarily concerned with the receipts and expenditure of central government.
Main Objectives of Fiscal Policy In India
 Development by effective Mobilization of Resources
 Efficient allocation of Financial Resources
 Reduction in inequalities of Income and Wealth
 Price Stability and Control of Inflation
 Employment Generation
 Balanced Regional Development
 Reducing the Deficit in the Balance of Payment
 Increasing National Income
 Foreign Exchange Earnings
Development by effective Mobilization of Resources
 The principal objective of fiscal policy is to ensure rapid economic growth and
development. This objective of economic growth and development can be achieved by
Mobilization of Financial Resources
 The central and the state governments in India have used fiscal policy to mobilize
resources.
The financial resources can be mobilized by:
 Taxation: Through effective fiscal policies, the government aims to mobilize resources
by way of direct taxes as well as indirect taxes because most important source of resource
mobilization in India is taxation.
 Public Savings: The resources can be mobilized through public savings by reducing
government expenditure and increasing surpluses of public sector enterprises.
 Private Savings : Through effective fiscal measures such as tax benefits, the government
can raise resources from private sector and households.
Efficient allocation of Financial Resources
 The central and state governments have tried to make efficient allocation of financial
resources. These resources are allocated for Development Activities which includes
expenditure on railways, infrastructure, etc
While Non-development Activities includes expenditure on defense, interest payments,
subsidies, etc.
 But generally the fiscal policy should ensure that the resources are allocated for
generation of goods and services which are socially desirable.
 Therefore, India's fiscal policy is designed in such a manner so as to encourage
production of desirable goods and discourage those goods which are socially undesirable.
Reduction in inequalities of Income and Wealth
 Fiscal policy aims at achieving equity or social justice by reducing income inequalities
among different sections of the society. The direct taxes such as income tax are charged
more on the rich people as compared to lower income groups. 
 Indirect taxes are also more in the case of semi-luxury and luxury items, which are
mostly consumed by the upper middle class and the upper class.
Price Stability and Control of Inflation
 One of the main objectives of fiscal policy is to control inflation and stabilize price.
Therefore, the government always aims to control the inflation by reducing fiscal deficits,
introducing tax savings schemes, Productive use of financial resources, etc.
Increase capital
 The objective of fiscal policy in India is also to increase the rate of capital formation so
as to accelerate the rate of economic growth.
 In order to increase the rate of capital formation, the fiscal policy must be efficiently
designed to encourage savings and discourage and reduce spending.
Increasing National Income
 The fiscal policy aims to increase the national income of a country. This is because fiscal
policy facilitates the capital formation. This results in economic growth, which in turn
increases the GDP, per capita income and national income of the country.
Foreign Exchange Earnings
 Fiscal policy attempts to encourage more exports by way of Fiscal Measures like,
exemption of income tax on export earnings, exemption of sales tax and octroi, etc.
 Foreign exchange provides fiscal benefits to import substitute industries.
Types of fiscal policy
 Discretionary Fiscal Policy 
 Expansionary Fiscal Policy
 Contractionary Fiscal Policy
Expansionary Fiscal Policy
Expansionary fiscal policy uses increased government spending, reduced taxes or a combination
of the two. The chief objective of a fiscal expansion is to increase aggregate demand for goods
and services across the economy, as well as to reduce unemployment
Contractionary Fiscal Policy
 When government policy-makers cut spending or increase taxes, they engage in
contractionary fiscal policy. Governments may enact contractionary measures to slow an
economic expansion and prevent inflation..
 In addition, governments may enact contractionary policy for ideological reasons. These
include reducing the overall size and scope of government activity or lowering budget
deficits, in which the government spends more money than it collects. 
Discretionary fiscal policy
 Discretionary fiscal policy is the portion of the Federal government's actions that can be
changed year to year by Congress and the President. It is usually executed through each
year's budget or through changes in the tax code.
Fiscal policy in India
Fiscal policy is how the government manages its budget. It collects revenue via taxation that it
then spends on various programs. Elected officials guide fiscal policy, redirecting funds from
one sector of the population to another. The purpose of fiscal policy is to create healthy
economic growth and increase the public good for the long-term benefit of all. As you can
imagine, legislators and their constituents have different ideas of the best way to do that. As a
result, fiscal policy is usually hotly debated, whether at the federal, state, county or municipal
level.
 Ministry of Finance.The main aim of the Fiscal Policy is to see the
threechildrenarefinei.e.PublicDebt,PublicExpenditureandPublicRevenuetoachievecertain
objectiveslikegrowth,stability,unequaldistribution of
 Income.
Measures of fiscal policy
Fiscal policy is the policy under which the government of a country uses fiscal measures (or
instruments) to correct excess demand and deficient demand and to achieve other desirable
objectives. There are mainly three types of fiscal measures, viz.

 Taxes
 Public expenditure
 public borrowing
Taxes
 Excess of aggregate demand over aggregates supply is caused due to the excess amount
of money income is the hands of the people in relation to the available output in the
country. 
  In order to correct such situation personal disposable incase should be reduced.
Therefore, government should increase the rate of personal income tax, and corporate
income tax so that people will have less money in their hands and aggregates demand
will fall.
Public expenditure
 Public expenditure is an important component of aggregate demand. Therefore, excess
demand can be corrected by reducing government expenditure. Reduction in government
expenditure also leads to a decline in the volume of national income due to the backward
operation of investment multiplier. Reduction in national income leads to a decline in
aggregate demand and fall in the price level.
 On the other hand, government should increase expenditure on public works programmes
such as the construction of roads, expansion of railways, setting up of power projects,
construction of irrigation projects, schools and colleges, hospitals and parks and so on.
Besides, government should also enhance expenditure on social security measures, like
old age pensions, unemployment allowances, sickness benefits etc. 
Public borrowing
 Like tax and public expenditure, public borrowing is also an important anti – inflationary
instrument. Government of a country should resort to borrowing from the non-bank
public to keep less money in their hands for correcting the state of excess demand and
inflationary situation.
 On the other hand, to correct deficient demand, government should reduce borrowing
from the general public so that purchasing power in the hands of the people is not
reduced
 Besides the above fiscal measures, government should resort to deficit financing to
correct deficient demand. Deficit financing is a technique of financing a deficit budget by
(i) printing notes, & (ii) borrowing from the central bank or drawing down the cash
balances on part of the government from the central bank. Deficit financing makes an
addition to the total money supply of the country and can correct deficient demand.
Criticisms of Fiscal Policy
 Disincentives of Tax Cuts. 
 Side Effects on Public Spending.
 Poor Information
   Time Lags.
 Budget Deficit
 Other Components of AD
Disincentives of Tax Cuts
Increasing Taxes to reduce AD may cause disincentives to work, if this occurs there will be a fall
in productivity and AS could fall. However higher taxes do not necessarily reduce incentives to
work if the income effect dominates.
Side Effects on Public Spending
Reduced govt. spending to Increase AD could adversely effect public services such as public
transport and education causing market failure and social inefficiency.
Poor Information
Fiscal policy will suffer if the govt. has poor information. E.g.  If the govt. believes there is
going to be a recession, they will increase AD, however if this forecast was wrong and the
economy grew too fast, the govt. action would cause inflation.
Time lags
If the govt. plans to increase spending this can take a long time to filter into the economy and it
may be too late. Spending plans are only set once a year. There is also a delay in implementing
any changes to spending patterns.
Budget Deficit
 Expansionary fiscal policy (cutting taxes and increasing G) will cause an increase in the
budget deficit which has many adverse effects. Higher budget deficit will require higher
taxes in the future and may cause crowding out 
Other Components of AD
 If the government uses fiscal policy its effectiveness will also depend upon the other
components of AD
 For example if consumer confidence is very low, reducing taxes may not lead to an
increase in consumer spending.
Fiscal Policy and Development in Madhya Pradesh
 The greatest damage of the influence of neo-liberal macroeconomic advice from the
Asian Development Bank is its emphasis on 'self-sufficient' state governments exercising
'fiscal discipline'. Obviously wasteful expenditure is a bad thing. State governments must
reduce the slack in resource mobilization and expenditure.
 This however is not the fundamental problem for Madhya Pradesh today. The problem is
that MP has too little public investment and a low growth of state income, etc. There is
little merit in the argument in favor of a smaller or zero fiscal deficits, if the spending is
aimed towards increasing state income and employment.
Who control fiscal policy?
 In India the president and congress together control the fiscal policy.
Effect of fiscal policy
 Unemployment
 Expansion
 Contraction
 Inflation Issues
Unemployment
 Unemployment is often stable in the long term, with a certain amount of the population
unable to work simply because of the constraints of a free market economy. Governments
often choose to develop fiscal policies that attempt to decrease this stable rate of
unemployment.
 Governments also work to encourage economic growth as a whole, funding expansion
through subsidies, tax cuts and new contracts with domestic and international partners. In
many cases, this can actually encourage inflation if a government only works to help
increase demand and buying power within its economy. Demand goes up, prices rise and
then wages rise.
Contraction
Governments worried about inflation can attempt to decrease inflation rates through
contraction, using fiscal policy to reign in natural inflation. The government usually
switches interest rates, raising them to discourage too much rampant spending, or raises a
certain sector of taxes by a small amount to accomplish the same effect. Product
continues, but spending becomes safer and more concentrated, and inflation tends to
decrease as a result.
Inflation Issues
 Economists often discuss how much effect any fiscal policy can have on inflation.
Government policies may seem to control inflation, especially in the short term, but long
term changes are much more difficult to ascertain.
 In an increasingly global economy and a free market economy, the changes a
government can make may be minimal or ineffective. Consumers tend to decide inflation
themselves, and government actions may sometimes have the opposite effects intended.

Monetary Policy of India is formulated and executed by reserve bank of India to achieve specific
objectives.
The monetary policy is defined as discretionary act undertaken by the authorities designed to
influence (A) the supply of money (B) cost of money or rate of interest (C) the availability of
money for achieving specific objectives
The main elements of monitory policy are
(1) It regulates stock and growth rate of money supply
(2) It regulates the entire banking system of the economy
(3) It regulates the level and structure of interest rates directly in organised sector and
indirectly in unorganised sector
(4) It determines the allocation of loans among different sectors

OBJECTIVES OF MONETARY POLICY

 Full employment
 To attain price Stability
  To Promote economic growth
 To attain exchange stability
 To Promote saving and investment
 To Control Trade cycle
 To Promote Employment
 To Regulate Money Supply In Economy
INSTRUMENTS OF MONETARY POLICY

 Bank Rate
 Statutory Liquidity Ratio
 Open Market Operations
 Cash Reserve Ratio
 Repurchase Auction Rate(Repo) and Reverse Repurchase Auction Rate (Reverse
Repo)
 Margin Requirement
 Credit Ceiling
 Direct Action
 Moral Persuasion

Bank Rate

Bank Rate is also known as discount rate. It is the rate at which RBI lends to the
commercial banks or rediscounts their bills. If bank rate is increased, then commercial
banks also charge higher rate of interest on loans given by banks to public because now
commercial banks get funds from RBI at higher rate of interest. Higher rate of interest
will contract credit in the economy i.e. public will take lesser loans because of higher rate
of interest. The current bank rate is 9.00% (w.e.f. 28/01/2014)

Statutory Liquidity Ratio

It means a certain percentage of deposits is to be kept by banks in form of liquid assets.

This is kept by bank itself the liquid assets here include government securities, treasury
bills and other securities notified by RBI. If SLR is more, then banks have to keep more
part of deposits in specified securities and banks will have less surplus funds for granting
loans. It will contract credit.SLR is fixed by RBI and usually it has been ranging between
24% to 39%.The current SLR is 22.00 %(w.e.f. 09/08/2014) (announced on 05/08/2014) .

Open Market Operations

It means that the bank controls the flow of credit through the sale and purchase of
securities in the open market. When securities are purchased by central bank, then RBI
makes payment to commercial banks and public. So, the public and commercial banks
now have more money with them. It increases money supply with commercial banks and
public. This will expand credit in the economy. In year 2012-13 RBI Purchases securities
8,000 crore.
Cash Reserve Ratio

Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to
keep with RBI in the form of reserves or balances .Higher the CRR with the RBI lower
will be the liquidity in the system and vice-versa. RBI is empowered to vary CRR
between 15 percent and 3 percent. But as per the suggestion by the Narshimam
committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As
of June 2014, the CRR is 4.00% (wef   09/02/2013) -announced on 29/01/2013

Repurchase Auction Rate (Repo) and Reverse Repurchase Auction Rate (Reverse Repo)

Repo rate is the rate at which RBI lends to commercial banks generally against
government securities. Reduction in Repo rate helps the commercial banks to get money
at a cheaper rate and increase in Repo rate discourages the commercial banks to get
money as the rate increases and becomes expensive. Reverse Repo rate is the rate at
which RBI borrows money from the commercial banks. The increase in the Repo rate
will increase the cost of borrowing and lending of the banks which will discourage the
public to borrow money and will encourage them to deposit. As the rates are high the
availability of credit and demand decreases resulting to decrease in inflation. This
increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of the policy. As
of June 2014, the repo rate is 8.00% (w.e.f.28/01/2014) and reverse repo rate is 7.00%
(w.e.f.28/01/2014).

Margin Requirement

Margin is the difference between loan value and market value of security. It is fixed by RBI. For
different types of loans, margin requirement is different .If margin % is more, and then less loan
will be given for a certain value of security and vice versa. E.g. if margin requirement is 20%
then bank will give maximum 80% of the market value of security as loan. For priority sector,
margin requirement is less and in areas where credit is to be contracted margin requirement is
increased.

Credit Ceiling

In this operation RBI issues prior information or direction that loans to the commercial banks
will be given up to a certain limit. In this case commercial bank will be tight in advancing loans
to the public. They will allocate loans to limited sectors. Few example of ceiling are agriculture
sector advances, priority sector lending.

Direct Action

According to 1949 act, Reserve bank can stop any commercial bank from any type of
transaction. In case of defiance of the orders of reserve bank, it can resort to direct action against
the member bank. It can stop giving loans and even recommend the closure of the member bank
to the central government under pressing circumstances.

Moral Persuasion

Reserve bank can also exercise moral influence upon the members’ banks with a view to pursue
its monetary policy. RBI convinces banks to curb loan to unproductive sectors. From time to
time reserve bank holds meetings with the member banks seeking their cooperation in effectively
controlling the monetary system of the country. It advices them to extend more credit to priority
sector.

LIMITATIONS OF MONETARY POLICY MEASURES

 Poor Banking Habit

 Underdeveloped Money Market
 Existence Of Black Money
 Conflicting Objectives
 Lack Of Coordination With Fiscal Policy
 Lack Of Banking Facilities
 Limitations of Monetary Instruments

INFLATION

 Inflation is defined as a sustained increase in the price level or a fall in the value of
money.
 When the level of currency of a country exceeds the level of production, inflation
occurs.
 Value of money depreciates with the occurrence of inflation.
 According to C.CROWTHER, “Inflation is State in which the Value of Money is
falling and the Prices are rising.”
 In Economics, the Word inflation Refers to General rise in Prices Measured against a
Standard Level of Purchasing Power.

Types of Inflation

Inflation is when the prices of goods and services increase. There are four main types of
inflation, categorized by their speed: creeping, walking, galloping, and hyperinflation. There are
also many types of asset inflation and of course wage inflation. Many experts consider demand-
pull and cost-push to be types of inflation, but they are actually causes of inflation, as is
expansion of the money supply.

1. Creeping Inflation

2. Walking Inflation

3. Galloping Inflation

4. Hyperinflation

5. Stagflation

6. Core Inflation Rate

7. Deflation

8. Asset Inflation
1. Creeping Inflation

Creeping or mild inflation is when prices rise 3% a year or less. According to the U.S. Federal
Reserve, when prices rise 2% or less, it's actually beneficial to economic growth. That's because
this mild inflation sets expectations that prices will continue to rise. As a result, it sparks
increased demand as consumers decide to buy now before prices rise in the future. By increasing
demand, mild inflation drives economic expansion.

2. Walking Inflation

This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to the
economy because it heats up economic growth too fast. People start to buy more than they need,
just to avoid tomorrow's much higher prices. This drives demand even further, so that suppliers
can't keep up. More important, neither can wages. As a result, common goods and services are
priced out of the reach of most people.

3. Galloping Inflation

When inflation rises to ten percent or greater, it wreaks absolute havoc on the economy. Money
loses value so fast that business and employee income can't keep up with costs and prices.
Foreign investors avoid the country, depriving it of needed capital. The economy becomes
unstable, and government leaders lose credibility. Galloping inflation must be prevented.

4. Hyperinflation

Hyperinflation is when the prices of most goods and services skyrocket, usually more than 50% a
month. It usually starts when a country's Federal government begins printing money to pay for
fiscal spending. As the money supply increases, prices creep up as in regular inflation.

5. Stagflation

Stagflation is when the economy experiences stagnant economic growth, high unemployment
and high inflation. It's a highly unusual situation because a slow economy usually reduces
demand enough to keep prices from rising. As workers get laid off, they buy less. As a result,
businesses get into a competitive price war to attract whatever customers remain. Slow growth in
a normal market economy prevents inflation.

What Causes Stagflation?

Stagflation is caused by circumstances similar to those that create hyperinflation. Both extreme
situations have only occurred when expansive fiscal or monetary policy artificially boosted the
money supply at the same time when supply was constrained. Fiscal policy can print more
currency, while monetary policy creates more credit. If supply is limited or shut down, then
companies can't produce more to meet the demand created by the extra money supply.

6. Core Inflation Rate

The core inflation rate is the measurement of inflation without food and energy prices. The core
inflation rate is measured by both the core Consumer Price Index, or core CPI, and the core
Personal Consumption Expenditures price index, or core PCE price index.
 7. Deflation

Deflation is when asset and consumer prices continue to fall. This may seem like a great thing to
consumers, except that the cause for widespread deflation is a long-term drop in demand.
Unfortunately, a drop in demand means that a recession is probably already underway, with job
losses, declining wages, and an ongoing decline in the value of your home and your stock
portfolio. As a result, businesses drop prices in a desperate attempt to get people to buy their
products.

How Is It Measured?

Officially, deflation is measured by a decrease in the Consumer Price Index. However, the CPI
does not measure stock prices, which retirees use to fund purchases, and businesses use to fund
growth. More important, the CPI does not include sales price of homes. Instead, it calculates the
monthly equivalent of owning a home, which it derives from rents.

8. Asset Inflation

An asset bubble is formed when the prices of asset, such as housing, stocks or
gold, become over-inflated. Prices rise quickly over a short period of time, and are not supported
by underlying demand for the product itself. It's a bubble when investors bid up the price beyond
any real sustainable value. This price spikes often occur when investors all flock to a particular
asset class, such as the stock market, real estate or commodities.

Causes

Asset bubbles are often initially caused by low interest rates. Low rates create an over-expansion
of the money supply. Investors can get borrow cheaply, but can't receive much return on bonds,
so they look for another asset class. Also Known As: Asset inflation

Inflation - Causes and Effects

Causes of Inflation

1. When the economy is good and people have enough money they want to buy more
products than factories can produce, so the prices go up.

2. When worker’s demand more money or when the raw materials that producers need rise
in price. The end product becomes more expensive and has to be sold at a higher price.

3. Some economists say that central banks do not do enough to control how much money
there is in a country. There may be more money around than there are goods. Consumers
want to buy more products, the demand gets higher and prices go up.

4. Low interest rates on loans make people borrow money to buy houses or cars. These
prices go up as well.
 5. Inflation is not produced by one country alone. Sometimes a country cannot control the
prices of certain goods as it would like to. A country that does not have any energy
supplies of its own has to import energy. It has to pay a high price for oil and gas.

6. Inflation in the past happened in times of crisis, war or conflict. Governments printed too
much money and didn’t have the goods that people could buy. This happened in the final
years of World War II. By the end of the war the German currency was not even worth
the paper on which it was printed.

Effects of inflation

 Inflation is a sign that the economy is growing. It is normal when prices go up only a few
percent every year. High inflation, on the other hand, leads to uncertainty in the
population.

 Industries may not want to borrow money and invest when inflation is high. People don’t
want to buy goods any more. Factories may get stuck with products they cannot sell and
as a result workers get unemployed.

 It is very difficult to fight inflation. Banks can control interest rates and make it difficult
for people to get loans and have more money. Governments have an effect on inflation
when they raise or lower taxes. They can also try to control wages and prices as far as
possible.

Negative Effects of Inflation

Inflation has a number of effects. These are worthy of note to businesses, investors and everyday
consumers:

 Unemployment: When the cost of goods and services go up, companies have higher
overhead costs and consumers purchase less. This can lead to a downturn in the economy
where jobs are the first casualty.
 Investment Bubbles: When inflation is kept artificially low it can lead to speculative
lending and borrowing. This has a tendency to increase bad investments overall–a
tendency that will eventually be corrected by the market.
 Hoarding: Particularly during periods of hyperinflation, people have a tendency to hoard
goods. This is because the goods might cost more tomorrow than they did today.
 Social Unrest: One of the most far-reaching effects of inflation is general social unrest.
Food inflation was identified as one of the primary causes behind the Arab Spring
revolts.

Positive Effects of Inflation

Inflation isn’t without its positive effects. Even hyperinflation can have beneficial effects:

 Debt: High inflation tends to wipe out debt. Once the current inflation rate exceeds the
interest rate on a loan or other debt, inflation is literally eating it away.
 Mundell-Tobin effect: This is a complex effect related to inflation. Moderate inflation
has a tendency to cause firms holding onto money to start lending. This glut of lending
capital causes interest rates to fall. This in turn makes it easier for firms to get loans for
further investment and economic growth.
  Offsetting negative effects of deflation: Deflation might sound good on the surface–an
increased value of your money. In reality, however, deflation often leads to short, sharp
jags of hyperinflation.

Measurement of Inflation

What is an Index Number?

An Index number is a single figure that shows how the whole set of related variables has
changed over time or from one place to another.  In particular, a price index reflects the overall
change in a set of prices paid by a consumer or  a producer, and is conventionally  known as a
Cost-of-Living index or Producer's Price Index as the case may be.

Price Indexes / Indices used in India

In India we use five major national indices for measuring inflation or price levels.  

(A) The Wholesale Price Index (base 1993-94) is usually considered as the headline inflation
indicator in India.  

(B) In addition to Whole Price Index (WPI), there are four different consumer price indices
which are used to assess the inflation for different sections of the labour force.  These are
discussed in more details later on.

(C) In addition to above five indices, the GDP deflator as an indicator of inflation is available for
the economy as a whole and its different sectors, on a quarterly basis

Wholesale Price Index (WPI)

 This index is the most widely used inflation indicator in India

 This is published by the Office of Economic Adviser, Ministry of Commerce and
Industry. 
 It is widely used by Government, banks, industry and business circles.
 It is in use since 1939 and is being published since 1947 regularly. 
 The current series of Wholesale Price Index has 2004-05 as the base year. 

Consumer Price Index (CPI)

 The CPI measures price change from the perspective of the retail buyer.
 It is the real index for the common people. It reflects the actual inflation that is borne
by the individual. 
 CPI is designed to measure changes over time in the level of retail prices of selected
goods and services on which consumers of a defined group spend their incomes. 
 Till January 2012, in India there were only  following four CPIs compiled and
released on national level.    (In some countries like UK, Malaysia, Poland it is also
known as Retail Price Index).

(1) Industrial Workers (IW) (base 2001),

(2) Agricultural Labourer (AL) (base 1986-87) and

 (3) Rural Labourer (RL) (base 1986-87)

(4) Urban Non-Manual Employees (UNME) (base 1984-85),

The first three are compiled by the Labour Bureau in the Ministry of Labour and
Employment, and the fourth is compiled by Central Statistical Organisation (CSO) in
the Ministry of Statistics and Programme Implementation.   These four CPIs reflect
the effect of price fluctuations of various goods and services consumed by specific
segments of population in the country.   These indices did not encompass all the
segments of the population and thus, did not reflect the true picture of the price
behaviour in the country as a whole.  

Producer Price Indexes (PPI)

 These are indices that measure the average change over time in selling prices by
producers of goods and services.
 They measure price change from the point of view of the seller. Majority of OECD
countries measure inflation based on Producer Price Index (PPI) while only some others
use WPI. 
 Countries like Japan, Greece, Norway and Turkey use WPI. 
 Already WPI has been replaced in most of the countries by PPI due to the broader
coverage provided by the PPI in terms of products and industries and the conceptual
concordance between PPI and system the national account.  
 PPI is considered to be more relevant and technically superior compared to one at
wholesale level.   However, in India we are still continuing with WPI.

Cost-of-living indices (COLI)

 This index aims to measure the effects of price changes on the cost of achieving a
constant standard of living (i.e. level of utility or welfare) as distinct from
maintaining the purchasing power to buy a fixed consumption basket of goods and
services. 
 A COLI allows for the fact that households who seek to maximize their welfare from
a given expenditure can benefit by adjusting their expenditure patterns to take account
of changing relative prices by substituting goods that have become relatively cheaper,
for goods that have become relatively dearer. 
 The use or preference for particular goods may also change.  
 In the long run, the various PPIs, WPIs and the CPI show a similar rate of inflation. In
the short run PPIs often increase before the WPI and CPI. Investors generally follow
the CPI more than the PPIs. In India WPI is used instead of CPI.

Wish You All the Best

Dr Amit Khare