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Context:

The Ministry of Statistics is revising the CPI base year to 2024 and seeking feedback on including free PDS items in inflation calculations.

About Consumer Price Index (CPI)

It measures the average change in the prices of goods and services that are commonly consumed by households. It monitors inflation and adjusts the purchasing power of money over time.

It is essential for the Reserve Bank of India (RBI) to set monetary policy, adjust wages, income tax brackets, and social security payments, and use GDP as a deflator to assess real economic growth.

Key components of the CPI

• Food and Beverages: Cereals, pulses, vegetables, milk, meat, beverages, etc.
• Housing: Rent or imputed rent for self-occupied houses.
• Clothing and Footwear: Costs of garments and footwear.
• Fuel and Light: Includes LPG, kerosene, firewood, and electricity.
• Miscellaneous: Education, healthcare, transport, communication, and recreation expenses.

Who maintains the Consumer Price Index in India?

There are four consumer price index numbers, which are calculated, and these are as follows:

• CPI for Industrial Workers (IW)
• CPI for Agricultural Labourers (AL)
• CPI for Rural Labourers (RL) and
• CPI for Urban Non-Manual Employees (UNME)

While the Ministry of Statistics and Program Implementation collects CPI (UNME) data and compiles it, the remaining three are collected by the Labour Bureau in the Ministry of Labour.

New Proposals 

The Ministry of Statistics and Programme Implementation (MoSPI) is revising the CPI's base year from 2012 to 2024 to reflect the 2022-23 Household Consumption Expenditure Survey. 

MoSPI is also considering how to include free Public Distribution System (PDS) items in CPI calculations.

Why is MoSPI revising the CPI base year?

The current base year (2012) is no longer an accurate representation of India's changing consumption patterns. 

By updating to 2024, MoSPI hopes to provide a more accurate measure of inflation and improve the CPI's ability to guide monetary policy and economic decisions.

What are the potential benefits of including free PDS items in the CPI?

Including free PDS items in the CPI could provide a more accurate picture of consumer spending, especially during economic downturns when such distributions are expanded. 

This could help to better understand the true impact of inflation on households, especially those who benefit from government schemes such as the National Food Security Act (NFSA).

What is the issue with including free PDS items in the CPI?

Free PDS items complicate the CPI calculation by resulting in a mismatch between consumer expenditure and inflation measurement. These items are distributed for free, so they have no direct impact on household spending.  

Redistributing the weights of these items in the CPI basket may distort the inflation measurement, so they must be accurately represented. There is a risk that inflation figures will decline, hindering the index's ability to capture true price movements in consumer goods and services.   

What are the global practices regarding CPI and free PDS items?

Non-monetary transactions (such as free PDS items) are normally excluded from CPI calculations under international standards to reflect actual market prices and household expenditure, excluding government transfers such as free goods or services.

What is the timeline for the CPI revision?

MoSPI has set a January 15, 2025 deadline for stakeholders to provide feedback on proposed changes, including the treatment of free PDS items. The revised CPI series is expected to be implemented by the end of FY26.

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Source: 

Business Today