Theme: Legal Framework; Module: Department Workings

Author: Dr. Pradeep Reddy Sarvareddy

Published Date: 19 July 2026

The Proposed Change by the Government

We are all used to Wholesale Price (WPI) Index for price variation (either increase or decrease) for construction Contracts.  But now, things are changing and a new Producer Price Index (PPI) is on the way.  It has been officially announced. 

On 13 July 2026, the Ministry of Finance, Department of Expenditure, Procurement Policy Division issued Office Memorandum No. F.1/5/2026-PPD to the Secretaries and Financial Advisors of all Ministries and Departments.  Its operative sentence reads: "Ministries/ Departments are encouraged to adopt Producer Price Index (PPI) in place of Wholesale Price Index (WPI) in all price escalation clauses of future contracts, once PPI becomes available."

Read that sentence again, slowly, because three words in it will decide crores.  "Encouraged" but not yet mandated.  "Future contracts" but not existing Contracts.  "Once PPI becomes available" and availability, as we shall see, is exactly where the problem lies.

Alongside this memorandum, the Government has launched the WPI series with base year 2022-23 and announced that WPI will be published in parallel with PPI for about five years and then discontinued on or around the Year 2031.  In other words, the WPI index now has an expiry date.  This article explores the various aspects related to these indices.

What is WPI

In simple terms, WPI is a monthly report card of price changes.  The Office of the Economic Adviser under the Ministry of Commerce and Industry tracks the prices of 957 items (from paddy to Portland cement) collected from factories, mandis and ministries, and publishes index numbers on the 14th of every month.  The number published first is "provisional" and it becomes "final" and frozen after about ten weeks.  So, it is the practice that the WPI variation is applied on a quarterly basis for price variation which affects the payments of the Contractors.

A quick history.  WPI is re-based every 10 years or so.  One of the earlier ones was in the Year 1993-94, then the Year 2004-05, then the Year 2011-12 (which included 697 items) and now the Year 2022-23 (with 957 items).  As of now, the current contracts use the Year 2011-12 series, but the Year 2022-23 series (with 957 items) was launched in mid-2026 and is now the official current series.  So, irrespective of PPI, new Contracts will switch over to the Year 2022-23 series.

Back to the present.  Almost every price variation clause (including the Clause 10CC family in building works, the star formulas in MoRTH and NHAI documents) works by pointing at a published index.  These clauses are calculated using something like: take the cement component of the work done, multiply it by the movement in the cement index.  Similarly for some components like steel, bitumen, fuel and labour.  The final payment is not based on your actual cost, but as per your Bid Rates adjusted using the WPI.  Even for lumpsum or EPC projects, the base rate of items is considered and then the WPI is applied.  So, you could be getting paid more or less for these selected components. 

The WPI publishes item-level detail.  Not just "Manufactured Products" as one big number.  Plus a few items are identified separately like Bitumen, Cement, Steel, Sand, etc.  But, the problem is that the WPI covered approximately 20% only, on specific items like cement, steel, bitumen, fuel, aggregates, equipment, etc., while the remaining 80% of the items are not related to highway projects.  So, if you check the Standard Schedule of Rates (SSR) from one year to the next year, you will see a change but that change will not be similar to WPI change.  Hence, lots of disputes arise as the Contractor wants to use the latest SSR for delayed Works while the Department insists only giving a variation based on WPI.

Now, PPI is being introduced.  But as you will read later, as it stands now, PPI is slightly “worse” than WPI, as per my limited analysis.  Maybe PPI would be modified, but let us see what it is as of now.

NHCCI Index

Before understanding PPI, let us look at NHCCI.  Most of us have not even heard of this NHCCI.  But this quick history helps us understand the problem with the variation clause with price index.

Around the Year 2015, NHAI did an honest exercise.  The exercise checked how much WPI affected the highway projects.  The answer was embarrassing as WPI covered approximately 20% only, on specific items like cement, steel, bitumen, fuel, aggregates, equipment, etc.  The remaining 80% of the items in the WPI are related to food, textiles, pharmaceuticals, tobacco and other goods that are not related to highway projects. So, WPI was not a true benefit to the Contractors.  This is what I already noted above about the dispute between using SSR vs WPI for extended time periods.  NHAI’s exercise also noted this situation.

Therefore, NHAI decided to build its own index, i.e., the National Highways Construction Cost Index (NHCCI).  This NHCCI included items suitable for highway construction like aggregate at about 37%, bitumen at about 19%, steel at about 10%, cement at about 4%, and fuel, equipment and labour.  The NHCCI related prices came from concessionaires, from IOCL for bitumen and fuel, from the Joint Plant Committee for steel and so on, i.e., the real stakeholders in highway construction.   NHAI compiled and published the NHCCI data for roughly three years, i.e., from about Year 2015 to Year 2018.

I could not find what happened after that.  NHCCI appears not to have been written into the standard concession agreements or bidding documents as the operative escalation index.  The actual contracts continued to run on WPI along with IOCL rates and JPC rates, which is a slight hybrid of WPI.  (If someone has any info, kindly share with me and I would be happy to update this section, with due credit to you).

When bitumen prices spiked in early 2026, the Ministry had to issue a special compensation circular, which tells you no automatic index mechanism was quietly doing that job.  This is another example that the WPI or the hybrid WPI is not sufficient for the highway construction sector.

First understand that WPI or any other index does not translate to a direct change, rather the sub-index specific items will have some direct impact.  But such sub-index items, as of now, are only for about 20% and with the hybrid model, maybe about 40% (based on my experience).  Second, the real index or the hybrid model should be written in the Contract.  Otherwise, we will end up in disputes as is the current situation now. 

 The proposed Producer Price Index (PPI)

PPI is a bit more complex.  It includes two separate parts.  One is the input PPI (IPPI) which contractors will not use, and the second is the output PPI (OPPI)

The Input PPI measures the price a manufacturer pays for its own inputs, like what the cement plant pays to purchase coal and gypsum, what the steel mill pays for ore and power.  This means, the “input” required to produce coal or steel or something else is tracked separately.  It is being published only as a "trial" series and that too only for the manufacturing sector, and only from March 2026.  Four months of experimental data is not sufficient to conclude in any manner.  It is an interesting early-warning signal of cost pressure building up in supply chains, but it is not an instrument you can hang a contract clause on today, and the Government itself calls it a trial.  So, keep an eye out for this Input PPI.

The Output PPI measures the price a producer receives at the factory for what it sells, i.e., the ex-factory price of cement leaving the plant, steel leaving the mill, etc.  This is the index conceptually closest to the WPI, and it has been published monthly, alongside WPI, with the same 2022-23 base year, with data running from April 2023.

So, when the Office Memorandum of July 2026 refers to PPI, they mean the Output PPI.  In the context of variation index and for the rest of this article, I too refer to Output PPI as just PPI to avoid confusion.

The PPI is not a new or magic formula.  PPI is compiled by the same government office, from the same price data, collected from the same factories on the same portal, at the same basic price, using the same formula, on the same base year as the WPI.  For construction related work, both WPI and PPI are near twins.  I compared them with sub-data against 39 months of published data.  Most of the items like steel, cement, non-metals are almost similar.  A few items were slightly different.

The issue is not that WPI or PPI are wrong.  The issue is that their relevance to the highway construction is about 20% only.  Even the PPI includes items like 22% for agriculture, then food processing, textiles, pharma, etc.  So, at the outset, even PPI is not entirely different from WPI.  But, the sub-indices of PPI are a problem as they are written today.  Remember that in WPI, we could rely on the sub-indices and benefit, but sub-indices of PPI has some issues as noted below.

PPI Sub-indices issue

The WPI publishes 957 items for its sub-indices.  The PPI publishes only about 125 items for the sub-indices.  This situation is ripe for numerous disputes.  As someone said, when these kinds of things are written like this, only advocates will make money.

In the PPI, Bitumen is not a separate item like in WPI.  PPI includes one broad category called "Petroleum Products" together with petrol, diesel, ATF, naphtha and everything else that leaves a refinery.  A road contract's escalation formula that today reads, in substance, "bitumen component × movement in WPI-Bitumen" has no equivalent PPI data to point to.  Between March and May 2026, the WPI's Bitumen index leapt from around 105 to 162, i.e., a spike of over 54% in two months.  But, the PPI's blended "Petroleum Products" category rose but about 35% based on my rough calculations.

In PPI, Sand and aggregates are not separate items.  The WPI index had dedicated items for Sand/Beach Sand/Morum under "Minor Minerals" heading, because these aggregates are the largest cost in earthwork and road work.  But PPI does not have any such item and the nearest thing is a broad "Other Non-Metallic Minerals" category mixing many minerals together.  For the biggest item in a highway work, the new PPI is a step backwards from the WPI.

WPI included OPC, PPC and slag cements as separate items.  But PPI gives you only one category titled as "Cement".  Bad, but better, compared to Bitumen and Sand / aggregates. 

Remember that the WPI was earlier for the base Year 2011-12.  Then for the WPI 2022-23 series, we should be using a linking factor which is yet to be published.  A clause that escalates on an old-series item index has no officially published link to the new series at that item's level.  This is again a big issue for disputes.

As of now, this does not mean that PPI is a bad index.  Conceptually PPI is better than WPI as PPI is what advanced economies use, and it enables the more accurate “double deflation” method of measuring real GDP.  The problem with PPI is narrower and very practical: as published today, the PPI cannot feed the item-level escalation formulas that Indian construction contracts actually use.  In reality, the PPI is compiled from 1,382 item-level series internally but only the 125 broad categories are published.  Whether the OEA publishes the finer detail before the WPI sunset is, for contractors, the single most important open question in this entire transition.  So, PPI, as it stands today, is not better for the construction sector.

An example

For practical purposes, I took up a small exercise.  I assumed a road construction for a project of Rs. 100 Crores.  I assumed that the work was done in June 2026 with the base price of April 2025.  The WPI provided 3.3%, i.e., Rs. 3.3 cr. increase, while the PPI provided 3.2%, i.e., Rs. 3.2 cr. increase.  So, for a Rs. 100 cr. project, PPI was lower by about Rs. 4 lakhs.  We could say that is not bad.

But, if I considered a longer duration of say three years or so, the variation difference resulted in a loss of about Rs. 1 Cr., i.e., about 1% loss to the Contractor if we use PPI instead of WPI.  This is bad in my opinion.

Quick conclusions: the index matters and takes higher significance if your work is heavily based on fuels.  Sometimes, both PPI and WPI were similar, which means that PPI is not necessarily bad for everyone.  Disputes could increase if the gap between PPI and WPI is higher, especially during sudden price changes, like the war situation now.

What can a Contractor do today

Remember that PPI is official but is for “future projects”.  So your existing contracts maybe ok for now, but what happens after 5 years, when WPI is proposed to be stopped is a big question.  Further, as you bid for new projects, as the “future” means any date after 13 July 2026, you need to be aware of the variation index, i.e., WPI or PPI.  Even your contract extension or supplement agreements, should be clear as to which index you use to avoid disputes.  Keep asking for clarity in the pre-bid meetings.  The pre-bid answer may help you out if you enter a dispute and need some evidence in arbitration or court.

Most important suggestion I make is that you should start tracking both WPI and PPI from now on and prepare your RA Bills with both methods.  Save the data related to WPI and PPI.  When a dispute arises, maybe your two-index RA Bills could help your case.  Imagine a 1% clean claim.  I think that would be a great win for most contractors (which works only where the contract is unclear or the index changes midway, but where the clause clearly names one index, that index will prevail).  So, start building your record from now.

Conclusion

You have roughly 5 years to see the end of WPI.  PPI appears to be better but not necessarily for construction projects.  It is too early and the government may change the PPI, but such changes may not happen unless the industry represents to the government. 

The five-year parallel run of both WPI and PPI is not a grace period for nostalgia.  It is the industry's window to demand the one thing that would dissolve almost every problem in this article: publication of the PPI at item level, so that the star formulas contractors and employers have used for decades can simply repoint from one index to the other.  The index will change as that much is decided.  Whether it changes quietly, with clauses redrafted in time and formulas that still work or noisily, through a decade of arbitrations over vanished index lines, depends on the questions contractors ask in the next five years.  Ask them now, in writing, while they are still questions and not yet disputes.

As a friend said, “Contractors are the best friends of the Department.  They allow themselves to be tested and sacrificed without anything in return”.