Should free social transfers as well as foodgrains provided under the public distribution system be included in the calculation of retail inflation in India? This is the question the Ministry of Statistics is grappling with to revise the base year for the Consumer Price Index (CPI) as well as update the weights for various items in the CPI basket and improve the compilation methodology.
CPI is an important economic data and is used by the Reserve Bank of India's Monetary Policy Committee as a primary indicator for setting rates, it is used as a deflator for GDP and it is also a benchmark for real economic growth as well as index wages. Adjust income tax brackets and Social Security payments.
Accordingly, the Ministry of Statistics has now sought comments and suggestions from users, experts, scholars, government organizations, state governments, financial institutions and the public on 'Treatment of Free PDS Items in CPI Compilation'.
Currently, the base year for CPI is 2012, which is now being revised to 2024. The weights and item basket are derived from the 2022-23 Household Consumption Expenditure Survey (HCES).
“With the implementation of a new integrated food security scheme under the National Food Security Act (NFSA), the challenge of addressing free-distributed PDS items in the CPI formulation has come into focus,” the ministry said, adding that the central government will start the scheme from January 1, 2023. Provided free for one year to beneficiaries under Antyodaya Anna Yojana (AAY) and Priority Household (PHH) categories For providing food grains.
There are two challenges in free distribution of PDS items in the context of CPI compilation. These include mid-series adjustments when the prices of certain PDS items decrease or increase in the existing series, as well as inclusion in the CPI basket at the beginning of the series and whether free PDS items are included in the CPI basket. The next issue is free distribution of certain items in PDS for deriving weights and including them in CPI basket of new series of CPI.
At present, in those states/UTs where free distribution scheme is in place for all sections of the society, the weight of these items is distributed over other items of the section within the state/UT. “However, concerns were raised about the approach used to include this free delivery in the CPI compilation. It was argued that the method adopted does not accurately capture the impact of free foodgrain distribution on inflation,” the ministry noted.
It has sought comments from stakeholders by January 15, 2025.
As part of the initial revision exercise, the ministry is also working on several changes to improve the robustness and relevance of the new series.
“These updates aim to align with the latest technological advancements and reflect recent changes in consumption patterns. The initial revision of the CPI is a comprehensive and comprehensive exercise that revisits all existing processes and methodologies with a view to potential improvement. .