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Difficulty: MediumInflation Types, Price Indices (CPI, WPI), and Price Control Mechanisms

Which of the following statements regarding the price indices (WPI and CPI) and monetary inflation control mechanisms in India are correct?

  1. The Wholesale Price Index (WPI) measures price changes strictly for physical goods and excludes service sector transactions, whereas the Consumer Price Index (CPI) includes services such as medical care, education, and transport.Answer
  2. An upward adjustment of the Cash Reserve Ratio (CRR) by the Reserve Bank of India reduces the loanable funds available with commercial banks, thereby helping to suppress demand-pull inflation.Answer
  3. C
    The Office of the Economic Adviser in the Ministry of Commerce and Industry compiles and releases both the Wholesale Price Index (WPI) and the Consumer Price Index (CPI Combined).
  4. D
    Food items carry a significantly higher weightage in the Wholesale Price Index (WPI) basket than in the Consumer Price Index (CPI Combined) basket.

Answer

The correct statements are that WPI excludes services while CPI includes them, and that an increase in CRR by the RBI absorbs liquidity from commercial banks to curb demand-pull inflation.
The statement describing index coverage correctly notes that WPI excludes services while CPI incorporates service categories. Furthermore, the statement on monetary intervention accurately explains that increasing the CRR locks bank funds with the RBI, reducing overall money supply and restricting demand-pull inflation.

Step-by-Step Solution

1
Analyze index coverage and service inclusion in WPI vs CPI.
WPI monitors wholesale price trends of commodities only, omitting services. CPI measures consumer end-user retail prices and explicitly includes services like transport, healthcare, and education.
This confirms that the comparison regarding service coverage between WPI and CPI is factual.
2
Evaluate the quantitative monetary tool (CRR) impact on inflation.
Raising the Cash Reserve Ratio forces commercial banks to park more cash reserves with the RBI, shrinking money supply and credit capacity in the economy.
Lower credit capacity lowers consumer spending and aggregate demand, directly countering demand-pull inflation.
3
Verify publishing authorities and basket weightages of CPI and WPI.
CPI Combined is published by the National Statistical Office (NSO), MoSPI (not the Office of Economic Adviser). Furthermore, food items have a higher weightage in CPI (~45.86%) than in WPI (~24.38%).
Identifies the false statements regarding publishing authority and food weightage.

Key Concept

Structural differences between WPI and CPI metrics and quantitative monetary policy mechanisms for managing inflation.
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Topics

Inflation Types, Price Indices (CPI, WPI), and Price Control Mechanisms