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

Regarding price indices (Consumer Price Index and Wholesale Price Index) and monetary control mechanisms in India, which of the following statements are correct?

  1. CPI Combined incorporates service sectors such as housing, education, and healthcare, whereas WPI measures prices of physical goods only.Answer
  2. B
    The weightage allocated to food articles in the WPI basket is significantly higher than that in the CPI Combined basket.
  3. C
    An increase in the Cash Reserve Ratio (CRR) by the Reserve Bank of India enhances commercial bank lending capacity, expanding market liquidity.
  4. CPI Combined is compiled and published by the National Statistical Office (NSO), while WPI is released by the Office of the Economic Adviser (OEA).Answer

Answer

The correct statements are that CPI Combined includes service sectors (like housing, health, and education) whereas WPI covers only physical goods, and that CPI Combined is published by the National Statistical Office (NSO) while WPI is published by the Office of the Economic Adviser (OEA).
The correct statements accurately identify that CPI Combined includes service sectors (e.g., housing, education, medical care) whereas WPI excludes services, and that CPI Combined is published by the NSO (Ministry of Statistics and Programme Implementation) while WPI is released by the Office of the Economic Adviser (Ministry of Commerce and Industry).

Step-by-Step Solution

1
Analyze commodity basket coverage and service inclusion for CPI versus WPI.
CPI measures retail price changes including services like housing, medical care, and education, whereas WPI measures wholesale price changes of physical goods only (excluding services). Thus, the statement regarding service inclusion is correct.
Retail consumption reflects household expenditure on both goods and services, while wholesale markets trade physical commodities.
2
Evaluate the weightage of food items in CPI Combined versus WPI baskets.
CPI Combined assigns approximately 45.86% weight to Food and Beverages, whereas WPI assigns a total food weight of roughly 24.38%. Thus, claiming WPI has a higher food weightage is incorrect.
Retail inflation metrics prioritize household consumer baskets where food constitutes a major expenditure portion.
3
Assess the effect of Cash Reserve Ratio (CRR) adjustments on liquidity.
Raising CRR locks a larger share of bank deposits with the RBI, reducing commercial bank lending capacity and absorbing market liquidity. Thus, the statement claiming CRR increases lending capacity is incorrect.
CRR is a quantitative monetary tool used to contract money supply during inflationary periods.
4
Verify the publishing authorities for CPI Combined and WPI.
CPI Combined is published by NSO (MoSPI), while WPI is published by OEA (Ministry of Commerce and Industry). Thus, the statement regarding publishing agencies is correct.
Different administrative bodies compile retail and wholesale price series based on their mandates.

Key Concept

Structural differences between CPI Combined and WPI indices in India (coverage, food weights, publishing agencies) and monetary liquidity management via CRR.
Estimated Time:1m 15s
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Topics

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