Finance Descriptive Flashcards
What is a Balance Sheet?
A Balance Sheet is a summary of all the financial statements of a company at a given point in time. It reflects the company’s overall financial health and helps investors to take investment decisions. A standard balance sheet of a company is divided into two parts, which include Assets on the left side and Liabilities and equity on the right side.
Assets- These include all the things that a company owns which have financial value. It includes current assets like inventory, cash, loans given for less than one year and Fixed assets like property or land, machinery, equipment, trade receivables etc
Liabilities- These include the amount owned by the company such as current liabilities like short-term borrowings, short-term provisions and trade payables and non-current liabilities like long-term borrowings, provisions, and deferred-tax liabilities.
Equity- It includes a portion of the company’s funding which is provided by the shareholders. This includes equity share capital of a company owned by the shareholders for providing finance to the company.
The Balance Sheet follows the basic accounting equation that Assets must be equal to Liabilities and Equity. This equation ensures that the company’s balance sheet should always be balanced and provide information about the financial health of the company. By analysing a company’s balance sheet, investors can gain insights into the company’s financial performance, liquidity and solvency.
What is a Profit & Loss statement?
A Profit and Loss statement or Income Statement is a summary of the financial statements that shows the Revenues and Expenditure transactions of a company. It is used by the company, investors and analysts to measure the profitability and financial health of the company.
Features of a Profit and Loss Statement
1- Revenues: The income statement begins with total revenue or sales generated from the sales of goods and services. It includes income generated from both operating and non-operating sources
2- Cost of Goods Sold (COGS)- This includes the direct cost associated with producing or procurement of goods or services such as material cost, wages, machinery etc.
3- Gross Profit or Loss- This is calculated by subtracting Revenue from the Cost of Goods Sold (COGS). It gives the gross profit or loss generated from the core operation of a business and does not include non-operating revenues and expenses
5- Non-Operating Revenues and Expenses- This includes revenues and expenses that are not directly related to the core business operation. The non-operating revenue includes interests earned on investments, gain from the sale of assets, foreign exchange gain, rental income, dividend income, royalty income etc.
Non-operating expenses include loss on investment of shares, default on interest by the borrower, loss on foreign exchange, litigation expenses, loss on sale of assets etc.
6- Depreciation and Amortization- It includes the decrease in the value of assets due to wear and tear and expiry. A decrease in the value of tangible assets such as machinery, building, equipment etc is called depreciation and a decrease in the value of intangible assets like copyright, patents, trademarks and licenses is called Amortization.
At the bottom of the statement, the net income or net loss is calculated by subtracting the total revenue from the total expenses. A positive net income reflects that the company has generated profit while a negative net income indicates that the company has generated loss.
What is a Cash Flow Statement?
The Cash Flow Statement is a financial statement that provides information about the inflow and outflow of cash from different activities of the company. It shows how the changes in a company’s Balance Sheet affect Cash and Cash equivalents. It is particularly used to measure the short-term viability of a company to pay for its expenses.
A company can report a profit on its Income Statement but still may have insufficient cash to operate. Thus, the Cash Flow Statement is an important financial statement to measure the short-term viability of a company.
Components of Cash Flow Statement
1- Operating Activities: It includes the flow of cash from the day-to-day core operations of the business. The cash inflow in operating activities includes cash received from the sales of goods and services. Cash outflow includes payments given to suppliers for raw materials, salaries to employees and taxes paid to the government
2- Investment Activities- These include the flow of cash from the procurement and disbursement of long-term assets or Fixed Assets. Cash Inflow includes the sale of assets, interest received from dividends and other investments and recovery of loans. Cash Outflow includes the purchase of assets, disbursement of loans etc.
3- Financing Activities- These include the flow of cash due to the raising or disbursement of money from the lenders and shareholders. The Cash inflow includes raising money by issuing equity such as shares and bonds. Cash Outflow includes interest payment on various forms of borrowing such as debt repayment, dividend payment and Share repurchasing.
At the bottom of the Cash Flow Statement, the Net Cash flow is calculated by calculating the difference between the total cash inflow and total cash outflow from all three activities. A positive Net Cash Flow indicates that the company’s cash is increased while a negative Net Cash Flow indicates that the company’s cash is decreased.
What are Financial Ratios, explain Turnover Ratio?
Financial ratio is the analysis of two different numerical values taken from a financial statement of a company such as the Balance Sheet, Income Statement or Cash Flow statement. Financial ratios are used to assess different aspects of the company such as profitability, solvency, Liquidity and efficiency. The different types of financial ratios are
Turnover ratio, also known as the Activity Ratio, Efficiency Ratio or Asset Management Ratio is the financial ratio that assesses the efficiency of a company in utilising its Assets or Resources to generate sales or revenue. It helps in evaluating how effective is a company’s operation or productivity. The types of Turnover Ratios are:
1- Inventory Turnover Ratio- It measures the effectiveness of a company in managing its inventory. It evaluates how fast the company is selling or replacing its inventory. The formula for calculating the Inventory Turnover Ratio is “Cost of Goods Sold/Average Inventory”. A high inventory turnover indicates that the company is quickly selling its inventories
2- Accounts Receivable Turnover Ratio- It assesses how effective a company is in collecting its debts and extending credit for its business operations. It also indicates the effectiveness of a company’s credit and collection policies. The formula for calculating Accounts Receivable Turnover Ratio is “Net Credit Sales/Average Accounts Receivables”. A high Accounts Receivable Turnover ratio indicates that the company is collecting its payments from customers frequently.
3- Assets Turnover Ratio- It measures how effectively a company is utilising its assets to generate sales or revenue. The formula for calculating the Assets Turnover Ratio is “Net Sales/Average Total Assets”
4- Fixed Assets Turnover Ratio- It measures how effective a company is in generating sales or revenue from its Fixed assets or long-term assets such as plant & machinery, equipment, property etc. The formula for calculating the Fixed Assets Turnover Ratio is “Net Sales/Average Fixed Assets”.
What is a Profitability Ratio?
The Profitability Ratio assesses a company’s ability to generate profit and Rate of Return. Profit Margin ratios show the relationship between the company’s revenue and profit while the Rate of return ratios shows the relationship between investments and profit. The types of Profitability ratios are
1- Gross Profit Margin Ratio- It measures the ability of a company to generate profit from its core business operations. It is measured by deducting the Cost of Goods Sold (COGS) from the Revenue. The formula for calculating the Gross Profit Margin Ratio is “Revenue- COGS/ Revenue”
2- Net Profit Margin Ratio- It measures the overall ability of a company to generate profit after excluding COGS, Expenses, Interest, Taxes and other Costs. It is calculated by “Net Income/Revenue”
3- Return on Assets (ROA)- It measures the ability of a company’s assets to generate profit. It evaluates the profitability of the company’s assets. The formula for calculating ROA is “Net Income/Average Total Assets”
4- Return on Equity (ROE)- It measures the ability of a company to utilize its shareholder’s Equity to generate profit. It evaluates the quality of equity investments made by the company. The formula for the Return on Equity (ROE) is “Net Income/Average Shareholder’s Equity”.
5- Return on Investment (ROI)- It measures the overall investment profitability of the company. It includes both debt and equity investments. The formula for finding the ROI is “Net Profit/Cost on Investment”
What is a Liquidity Ratio?
Liquidity ratio assesses the ability of a company to meet its short-term financial obligations like its ability to generate cash and meet its immediate financial obligations. The three main types of Liquidity ratios are
1- Current Ratio- It measures the company’s ability to meet its short-term financial viability by using current assets. The formula for calculating Current Ratio is Current assets/Current Liabilities.
2- Acid-Test Ratio- The Acid-Test ratio or Quick asset ratio is a more stringent way than the Current Ratio to measure the short-term financial viability of a company. It takes the most liquid current assets and excludes inventory which is considered to be the least liquid component of Current Assets. The formula for calculating the Acid-Test ratio is Current Assets- Inventory/Current Liabilities.
3- Cash Ratio- It is the most stringent method to measure the short-term financial viability of a company as it takes only cash and cash equivalents. Cash and Cash equivalents such as cash-in-hand, bank balance, and securities like treasury bills, commercial papers etc are taken. The formula for calculating the Cash Ratio is Cash and Cash Equivalents/ Current Liabilities.
What is a Leverage Ratio?
The leverage ratio or Solvency Ratio is used to assess the extent of a company’s financing through debt and the extent of utilisation of its debt financing. It also measures the long-term financial obligation of a company such as its long-term ability to pay expenses. The types of Solvency ratios are
1- Debt-Equity Ratio- It compares a company’s debt financing with its Shareholder’s equity. It shows the proportion of the company’s financing that comes from creditors compared to shareholders. The formula for calculating the Debt-Equity ratio is “Total Debt/Shareholder’s Equity”. A higher Debt-Equity ratio indicates that there is a higher reliance on debt financing than Equity financing
2- Debt-Assets Ratio- It shows the proportion of a company’s Assets that are financed by Debt. The formula for the Debt-Assets ratio is “Total Debt/Total Assets”. A higher Debt-Assets ratio indicates that a higher proportion of a company’s Assets are financed by Debt.
3- Interest Coverage Ratio- It shows the ability of a company’s earnings to pay its interest expenses on outstanding debts. The formula for calculating Interest Coverage Ratio is “Earnings Before Interest and Tax/ Interest Expense”. A higher Interest coverage ratio indicates that the company has sufficient earnings to pay its interest expenses.
4- Debt Service Coverage Ratio (DSCR)- The Debt Service Coverage Ratio (DSCR) shows a company’s ability to meet its Debt-service obligations. Debt Service obligations include a combination of principal and interest payments that are required to be paid. The formula for calculating the DSCR is “Operating Income/Total Debt Service”
Explain Debtor Days and Creditor Days ratios?
Debtor Days Ratio- is the average number of days a company takes to collect payment from its debtors. It shows the effectiveness of the debt-collection policy of the company. The formula for calculating Debtor Days is “Average Accounts Receivable / Credit Sales * Number of Days”. A low Debtor days ratio shows that the company is collecting its payments quickly from debtors while a high debtor days ratio shows that the company is taking more time in collecting debt.
Creditor Days Ratio- is the average number of days the company takes to give payment to its creditors or suppliers. It reflects the creditworthiness of the company. The Creditor days ratio is calculated by “Average Accounts Payable / Cost of Sales * Number of Days”. An excessive Creditor Days ratio reflects the bad creditworthiness of the company but a High creditworthiness also reflects that the company has more cash flow for utilization for its management.
Write a note on the RBI and its key functions?
The Reserve Bank of India (RBI) is the central bank of India formed on April 1, 1935. It is the regulator of the Indian Banking system and works to ensure stability in the Indian financial system. RBI plays a key role in promoting financial inclusion and supporting the growth of the economy.
According to the Preamble, the basic functions of the RBI are:
- Printing and issuing banknotes in India
- Keeping reserve assets such as gold, foreign currencies, securities and other assets
- To implement the Monetary Policy framework to meet the challenges of the increasingly complex economy
- To maintain price stability while keeping in mind the economic growth of India
The Key functions of RBI are:
1- Issuer of Currency- The RBI is responsible for issuing banknotes and coins. The currency is printed and minted in various cities of India by the Bhartiya Reserve Bank Note Mudran (BRBNM) and The Security Printing and Minting Corporation of India (SPMCIL). The currency is supplied by the RBI to currency chests of selected scheduled banks, which then distribute to other branches and commercial banks.
2- Regulator of Banks and NBFIs- RBI is responsible for protecting the interest of depositors with an effective regulatory framework. The banks and Non-Banking Financial Institutions are regulated and supervised by the RBI under the provisions of the RBI Act, 1934 and the Banking Regulations Act, 1949. RBI sets standards and procedures for banking practices to ensure stability in the banking sector.
3- Monetary Policy Management- RBI is responsible for formulating and executing a monetary policy in India to maintain financial stability. It is a key tool to control inflation and the money supply in the market. RBI uses monetary policy tools such as the Repo rate, CRR, SLR, MSF, SDF and Bank rate to control the money supply in the market.
4- Regulating Forex Market- RBI is responsible for keeping foreign exchange reserves like foreign currency, bonds, gold, treasury bills, Special Drawing Rights (SDR) and other securities. This foreign exchange reserve is used to maintain the foreign exchange rate.
5- Banker’s Bank- RBI acts as a banker for commercial banks in the country. It acts as a Lender of the Last Resort and provides emergency funds to banks facing a shortage of funds. It acts as a Clearing House and facilitates interbank transaction services. It also provides the facility to deposit funds with the RBI through Reverse Repo and Standing Deposit Facility (SDF) and earn interest.
6- Banker to the Government- RBI acts as a banker to the government in the following ways:
- It receives and makes payments on behalf of the government
- It provides a temporary loan facility to the state and central governments through the “Ways and Means Advance (WMA)”
- It manages contingency funds, consolidated funds and public accounts of state and central governments
- It acts as an advisor to the government in formulating monetary and fiscal policies
- It facilitates issuing of government securities like bonds and treasury bills
- It issues public debt and new loans on behalf of the central and state governments
7- Payment and Settlement System- RBI regulates and supervises the payment and settlement system in India under the Payment and Settlement System Act, 2007. It uses the NPCI (National Payment Corporation of India) to regulate and supervise Bharat Bill Payment System (BBPS), Unified Payment Interface (UPI), RUPAY and other payment systems.
RBI also formulates guidelines and provisions for the RTGS (Real-Time Gross Settlement) and NEFT (National Electronic Fund Transfer). RBI has also recently launched a pilot project for implementing the Central Bank Digital Currency (CBDC).
8- Insurance on Deposit and Credit Guarantee- RBI provides insurance and credit guarantee services through Deposit Insurance and Credit Guarantee Corporation (DICGC). It provides insurance up to ₹5 lakhs for depositors in times when banks default or go bankrupt and provides a credit guarantee of up to ₹2 crores to depositors if depositors are unable to make the repayment of loans up to ₹2 crores.
History of RBI
The Reserve Bank of India (RBI) was formed on April 1, 1935, following the provision of the RBI Act, 1934. It was formed based on the recommendation of the Hilton Young Commission. RBI was nationalized in 1949 and since then it is fully owned by the Ministry of Finance, Government of India.
The first governor of RBI was Osborne Smith while the first Indian governor of the RBI was Chintaman.D.Deshmukh.
Explain Monetary Policy?
Monetary Policy is formulated and executed by the Reserve Bank of India (RBI). It is used by the RBI to control the money supply in the economy and boost economic growth. The first Monetary Policy Committee (MPC) was formed in 2016 to form a monetary policy framework. RBI uses the following monetary policy tools:
1- Open Market Operations (OMO)- Open Market Operations (OMO) is the buying and selling of government securities like bonds, treasury bills etc by the RBI. The RBI sells government securities to decrease the money supply in the economy and purchases government securities to increase the money supply in the economy.
2- Liquidity Adjustment Facility (LAF)-Liquidity Adjustment Facility includes the Repo agreement and Reverse Repo agreement. Under the Repo agreement, RBI increases the Repo rate for banks to decrease the money supply as borrowers will buy less due to the increased Repo rate. Similarly, RBI decreases the Repo rate which leads to more borrowing and increases the money supply.
Under a Reverse Repo operation, RBI borrows money from the banks to squeeze liquidity and decrease the money supply. RBI increases the reverse repo rate which encourages banks to deposit money with the RBI, resulting in a decrease in the money supply. RBI decreases the Reverse Repo rate which discourages banks to deposit money with the RBI, thus, increasing the money supply.
Note- It is called the Repo or Repurchase agreement because securities are sold against credit with an agreement to repurchase those securities at a predetermined rate and date.
3- Bank Rate- It is the rate at which the RBI provides credit to banks for the long term. RBI increases the bank rate which increases the cost of borrowing from RBI, thus, decreasing the money supply. RBI decreases the bank rate which decreases the cost of borrowing, thus increasing the money supply.
The key difference between the Bank rate and the Repo rate is that banks are required to pledge securities as collateral in the Repo rate but Banks are not required to pledge collateral to avail of loans at the Bank rate.
The bank rate is aligned with the MSF rate which means that the Bank rate is equal to the MSF rate. Thus the connection between the Repo rate, Bank rate and MSF rate is:
MSF Rate = Repo Rate + 0.25% Bank Rate and Bank rate = MSF Rate
4- Marginal Standing Facility (MSF)- It is another short-term credit facility provided to banks only in times of emergency. The credit is provided against the SLR (Statutory Liquidity Ratio) of the bank and up to 3% of their NDTL (Net Demand and Time Liability). The minimum amount of ₹1 crore is provided and afterwards, a multiple of ₹1 crore.
RBI increases and decreases the MSF rate similarly to the Repo rate to control the money supply in the economy.
5- Reserve Requirement- Banks are required to maintain the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as a percentage of their NDTL specified by the RBI. CRR is the cash reserve that banks have to keep with the RBI. It is mainly used by the RBI to control the money supply.
SLR is the percentage of deposits of banks’ liquid assets such as bonds, gold, cash and other government securities that they have to keep with themselves. It is used to control the money supply. However, it is also used to ensure the bank is solvent. The maximum limit of SLR is 10%.
6- Long-Term Repo Operation (LTRO)- The Long-Term Tepo Operation (LTRO) is another monetary policy tool used by RBI to provide liquidity to banks at a “Repurchase Agreement (REPO)”. Liquidity is provided to banks at a repo rate or more than the repo rate for a tenure of 1 to 3 years. Thus it fulfils the long-term financing needs of banks.
The LTRO reduced the cost of borrowing for banks which is an important component of the MCLR (Marginal Cost of Lending Rate). Thus, banks also have their MCRL rate which leads to more borrowing by people. Therefore, It is used as a tool by the RBI to increase the money supply in the economy.
LTRO is provided through auction with a minimum bid of ₹1 crore and multiple of ₹1 crore.
Explain Fiscal Policy?
Fiscal Policy is the use of government revenue collections (Taxes and Non-tax) and expenditure to influence a country’s economy. The objectives of fiscal policy are to boost economic growth, reduce unemployment and control inflation.
Changes in the level of taxes and government expenditure affect the following macroeconomic indicators:
- Aggregate demand
- Savings and Investments
- Income distribution
- Allocation of resources
Expansionary Fiscal Policy
In an Expansionary fiscal policy, the government reduces taxes and increases expenditures that increase the aggregate demand of the country. Expansionary fiscal policy leads to an increase in the money supply in the economy which leads to an increase in aggregate demand for goods and services.
Expansionary Fiscal policy is used:
- To boost economic growth in the country
- To prevent or fight recession
- To increase lending and borrowing activity in the country
- To reduce unemployment
Contractionary Fiscal Policy
In Contractionary fiscal policy, the government increases taxes and reduces government expenditures that decrease the aggregate demand in the country. Contractionary fiscal policy leads to a decrease in the money supply which leads to a decrease in aggregate demand for goods and services. This leads to a decrease in the economic growth of the country.
Contractionary Fiscal policy is used:
- To curb or reduce inflation
- To reduce the budget deficit
- To control the balance of payment
What is Fiscal Deficit?
A fiscal deficit is a situation when the government’s Total expenditure exceeds the Total Revenue, excluding money borrowed by the government. This means that the government is spending more than it earns. It is expressed as the percentage of GDP (Gross Domestic Product). An Increase in fiscal deficit can lead to inflation.
The Formula of Fiscal deficit is “Total Expenditure – Total Revenue (Excluding Borrowings)”.
What is Inflation, what are causes and measures to control inflation?
Inflation is the rise in the general price of goods and services in an economy. Inflation leads to a decrease in the purchasing power of individuals. It causes each unit of currency to buy fewer goods and services, thus resulting in a decrease in purchasing power of the money. If a person buys a certain number of goods with a ₹100 note, he may not be able to buy the exact goods with a ₹100 note after 10 years due to inflation.
Negative Impacts of Inflation
- Inflation discourages investment and savings due to expectations of the rise in prices.
- It causes a shortage of goods because people start hoarding essential goods due to the expectations of the rise in prices.
- It impacts lower-income consumers as they are unable to buy goods and services and take prudent actions while spending their money.
Positive Impacts of Inflation
- It increases the profit for producers as they increase the price of goods produced.
- It increases the asset price of real estate, securities or other commodities.
- It increases employment if the inflation is caused by the high demand for goods and services.
Causes of Inflation
There are several causes of inflation however, the two main causes of inflation are:
1- Demand-Pull Inflation: This is caused when the aggregate demand for goods and services increases and exceeds the aggregate supply of goods and services. The aggregate demand might increase due to an increase in spending of consumers, businesses or governments. Therefore, inflation is caused because the supply of goods and services cannot meet the demand.
High demand for goods and services leads to high demand for labour or workforce in firms. To fulfil this high demand for the workforce, firms will hire more people and increase wages to retain the existing workforce. The increase in employment and wages will lead to two consequences:
- Firms will increase the prices of their goods and services to cover the cost of hiring. Higher prices of goods & services will again lead to inflation.
- Increase in employment and wages will lead to more money in the hands of consumers. Thus, consumers will spend more which will increase the aggregate demand leading to inflation.
2- Cost Push Inflation- This is caused when the increase in the cost of important goods or services such as crude oil, natural gas, food products and healthcare products causes inflation. It results in a decrease in the aggregate supply of goods and services. Therefore, aggregate supply cannot meet the aggregate demand for goods and services.
The increase in the cost of important goods or services increases the cost of production and to cover the cost of production, firms decrease the production and increase the price of their finished goods or services. Thus, resulting in inflation.
For example, an increase in the cost of crude oil will increase the cost of producing petrol and an increase in the cost of petrol will increase the price of petrol. Therefore, transportation costs will be increased resulting in an increase in the price of groceries and causing inflation.
Measures to Control Inflation
Monetary Measures
In monetary measures, The Reserve Bank of India (RBI) controls inflation by reducing the money in the economy. RBI takes the following measures for reducing the money supply and control inflation:
- RBI increases the bank rate and repo rate which compels commercial banks to borrow less from the RBI and banks also increase their interest rates for consumers which causes people to borrow less. Thus, reducing the money supply.
- RBI increases the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), due to which banks have less money to lend and thus reducing the money supply.
- RBI increases the Margin requirement of banks which hesitates consumers to borrow loans from banks since they have to pay more collateral for the same amount of loan. Thus reducing the money supply and controlling inflation.
- RBI will decrease the liquidity in the market by issuing government securities and reducing the money supply
- RBI’s recently introduced Standing Deposit Facility (SDF) can be used to squeeze excess liquidity from the banks and control inflation.
- RBI can direct banks to increase or decrease lending in one sector which is causing inflation. If there is food inflation, RBI will direct banks to increase agricultural loans which will help farmers to borrow loans to produce more and meet the demand for food.
Note!- Only Monetary policy alone cannot help to control Demand-pull inflation.
Fiscal Measures
Monetary policy is supplemented with Fiscal policy to control inflation. Government can take the following fiscal measures to control inflation:
- Government can increase income tax or Goods & Services Tax (GST) to reduce the money supply in the economy. An increase in income tax and GST will discourage households to spend and reduce the demand in the economy. Thus, reducing inflation.
- Government can reduce public expenditure on government projects and subsidies to control inflation. For example, the reduction in government projects will reduce the demand for labour and materials. This will reduce the spending of firms leading to a reduction in aggregate demand and therefore, reducing inflation.
Other Measures
- Government can increase the production of goods and services that are the cause of inflation. This can be done by implementing policies that are friendly for production like Procution Linked Incentive (PLI) and ease of doing business policies. Investment in new technologies by the government can also increase production.
- Government can use price control for controlling inflation. Government can do this by setting price limits on essential goods and services.
- Government can ban export or impose export restrictions on some goods. This will lead to a reduction in the money supply of firms and individuals who export their goods and thus, reduce inflation.
What is Stagflation?
Stagflation is a situation when there is stagnation in the growth of the economy and the general price of goods and services is also high. Therefore, it is a combination of slow economic growth and inflation.
Stagflation is a challenging economic condition because if the government decreases taxes or interest rates to boost the economy, it may lead to more inflation and if taxes or interest rates are increased to decrease inflation, it may lead to more decline in the economic growth. Hence, the government has to strike a perfect balance to control inflation.
What are WPI and CPI and what are their uses?
The Wholesale Price Index (WPI) is used to measure the average prices of commodities which are traded between producers and wholesalers. Prices are measured based on 697 commodities under three groups which are Primary articles, Fuel & Power and Manufactured Products.
Uses of WPI:
- It is used to measure inflation at a wholesale transaction level
- It is used to measure other macroeconomic indicators like GDP (Gross Domestic Product) and IIP (Index of Industrial Production)
- It is used by the RBI to take monetary policy decisions
- It is used by businesses to formulate policies related to the cost of production and revise their own prices
- It is used by investors to take investment decisions
WPI’s base year is set at 2011-12 and the score is set at 100. Its base year and score have been revised 6 times and currently, it is the seventh revision. WPI does not include services and taxes. It is released on the 14th of every month by the Office of Economic Advisor, Ministry of Commerce & Industry.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is used to measure the average change in prices of commodities at a retail level. It measures the change in the consumption price of households. CPI is measured using four types of indices with reference to their base year and score. The four indices are:
- CPI for Industrial Workers (CPI-IW)
- CPI for Agricultural Labourers (CPI-AR)
- CPI for Rural Labourers (CPI-RL)
- CPI for Urban and Rural combined
CPI Urban and CPI Rural are new indices and are likely to replace all other indices to measure the Consumer Price Index.
The price data is collected from towns by the NSSO (National Sample Survey Organization) and the Department of Posts (DOP) collects data from selected villages.
The CPI for Industrial Workers (CPI-IW) is published by the National Statistical Office (NSO), Ministry of Statistics & Programme Implementation while the other three are compiled by the Labour Bureau, Ministry of Labour & Employment.
Uses of CPI
- It is used to estimate inflation at a retail level
- It is used to measure other macroeconomic indicators like GDP (Gross Domestic Product) and IIP (Index of Industrial Production)
- It is used by the RBI to take monetary policy decisions
- It is used by businesses to formulate policies related to the cost of production and revise their own prices
- It is used by investors to take investment decisions
