CPI Rejig: India's inflation tracker should better capture the cost of living

Copyright © HT Digital Streams Limit all rights reserved. The Statistics Ministry has a difficult question: Does it have to adjust its retail inflation meter for free handouts? Inflation -data obtained from the consumer price index is an important economic indicator with multiple applications. (Mint) Summary India’s inflationary meter is set on a review of the Statistics Minister who reworks its consumer price index (CPI). Should this review take into account the free public distribution of food crabs? The answer will affect the information that feeds policy making. The Ministry of Statistics from India has released a discussion document on how items to be given away by the Public Distribution System (PDS) for free should be treated by the Consumer Price Index (CPI). It is a commendable effort to reach out to all stakeholders to improve the country’s tracker of retail inflation. The purpose of the ministry is to update ‘item weights, revise the consumer and include methodological improvements’ to compile the CPI through it ‘more robust, resilient and effective’. The importance of this exercise cannot be emphasized too much. Inflation -gained from this index is an important economic indicator with multiple applications. First of all, the central bank CPI-based inflation uses the most important measure of monetary policy decisions. Two, the government uses CPI information as an input for policy interventions aimed at social well -being. Three, CPI numbers go into the deflator used by our national accounts to adjust the nominal GDP for inflation to estimate the real growth of the economy. And four, the CPI is in handy for the indexing through which wages are reviewed, tax heets are updated and payments are adjusted to social security. The article deals with the difficult topic of how to best reflect the impact of items given for free or at subsidized rates under the PDS in the composition of the CPI. Under the National Food Safety Act, PDS sharing pieces are a must and the center’s Pradhan Mantri Garib Kalyan Anna Yojana, who offers free food cereals in eligible households, covers about 75% of our rural people and 50% of the urban population. A critical element of the composition of the CPI, apart from the choice of the base year (currently 2011-12), is the ‘weight’ assigned to each item in its consumption basket derived from India’s domestic consumer expenditure (HCES), of which the data 2011-12 remains in use for today’s range. The problem, in a nutshell, is what is best done in a situation where the price of a PDS item falls to zero – or vice versa, from zero to a positive value – that drops the life of an ongoing CPI series. Or items that are completely free should be included in the CPI basket, as households have no direct expenses on it. The article rightly suggests that taking into account the scope of PDS operations and its impact on consumption patterns, and taking into account the CPI’s purpose, free PDS items within the CPI framework must be accounted for. It seems in accordance with the IMF manual on the topic: “If the main reason for compiling a CPI is the measurement of inflation or as an input [for] Monetary policy decisions, the scope of the index should only be limited to monetary transactions, especially because non-monetary transactions do not raise any demand for money. “The CPI is in the process of being updated with a new base year, with its weights and basket rejected in accordance with the data from HCE’s 2023-24. Limited practices for free items and the CPI’s scope to monetary transactions.