Challenges in India’s Consumer Price Index Compilation

India’s statistical system faces challenges in integrating food items from the public distribution system (PDS) into the proposed new Consumer Price Index (CPI). This undertaking is crucial for accurately calculating retail inflation rates. The Ministry of Statistics and Programme Implementation (MoSPI) is leading this initiative, seeking input from various stakeholders to refine the CPI methodology.

Current Context

The MoSPI has released a discussion paper addressing the inclusion of free PDS items in the CPI. This revision is part of a broader effort to update the CPI base year from 2012 to 2024. The inclusion of these items poses unique challenges, particularly regarding their pricing and weight distribution in the CPI basket.

Challenges Identified

Two primary challenges have emerged in the integration of free PDS items into the CPI. First, there is the issue of mid-series adjustments. This involves determining how to transition the price of PDS items from a positive value to zero or vice versa. Second, there is the question of whether these items should be included in the CPI basket from the outset of the new series.

Methods for CPI Integration

The discussion paper outlines three potential methods for addressing the pricing of PDS items. 1. The first method suggests using a zero price and adjusting weights during future updates. 2. The second method involves redistributing weights among other items within the same category. 3. The third method proposes a broader redistribution of weights across all items in the CPI basket.

International Guidelines and Best Practices

The MoSPI’s approach aligns with international best practices as outlined by the International Monetary Fund (IMF). The IMF manual advocates for excluding items that incur no household expenditure from the CPI. This means that free social transfers may be disregarded in CPI calculations, as they do not reflect actual monetary transactions.

Implications for CPI Revision

The ongoing revision of the CPI base year aims to reflect more accurately the spending patterns of households. The weights and item basket will be derived from the Household Consumption Expenditure Survey (HCES) conducted in 2022-23. This will help ensure that the CPI is robust and reflective of current economic conditions.

Stakeholder Engagement

MoSPI is actively seeking feedback from experts, academicians, government bodies, and the public. This collaborative approach aims to ensure that the new CPI is comprehensive and effective in measuring inflation.

Future Considerations

As discussions progress, the treatment of free PDS items will remain a contentious issue. The statistical community must weigh the benefits of including these items against the potential distortions they may introduce into the CPI.

Questions for UPSC:

1. Discuss the impact of inflation measurement on economic policy formulation in developing countries.
2. Critically examine the role of public distribution systems in addressing food insecurity in India.
3. Explain the significance of household consumption expenditure surveys in economic planning.
4. With suitable examples, discuss the challenges of integrating non-monetary transactions in national accounts.

Answer Hints:

1. Discuss the impact of inflation measurement on economic policy formulation in developing countries.

1. Inflation measurement influences interest rates and monetary policy decisions, affecting investment and consumption.
2. Accurate CPI data helps governments assess the cost of living and adjust social welfare programs accordingly.
3. Inflation impacts currency stability, which is crucial for attracting foreign investment in developing economies.
4. Misleading inflation figures can lead to poor policy choices, exacerbating economic instability and inequality.
5. Inflation measurement is vital for international comparisons and attracting foreign aid or loans, impacting economic growth.

2. Critically examine the role of public distribution systems in addressing food insecurity in India.

1. The PDS provides subsidized food to low-income households, directly addressing hunger and malnutrition.
2. It acts as a safety net during economic shocks, ensuring food access for vulnerable populations.
3. However, inefficiencies and corruption in the PDS can undermine its effectiveness and reach.
4. The system can distort local markets by affecting food prices and availability if not managed properly.
5. Reforms are needed to enhance targeting and efficiency to better serve those in need and reduce leakage.

3. Explain the significance of household consumption expenditure surveys in economic planning.

1. These surveys provide essential data on consumer behavior and spending patterns, informing policy decisions.
2. They help in revising CPI weights, ensuring inflation measures reflect actual household expenditure.
3. Data from these surveys guide resource allocation for social programs and economic development initiatives.
4. They assist in understanding poverty levels and disparities in consumption across different demographics.
5. Surveys support forecasting economic trends, aiding in effective budget planning and fiscal policy formulation.

4. With suitable examples, discuss the challenges of integrating non-monetary transactions in national accounts.

1. Non-monetary transactions, like barter and free social transfers, complicate GDP calculations as they lack market prices.
2. For example, household production (like home gardening) contributes to welfare but is often excluded from economic data.
3. The treatment of free PDS items poses challenges in CPI measurement, as they do not reflect actual monetary expenditure.
4. International guidelines suggest excluding such transactions, leading to potential underestimation of economic activity.
5. Accurate accounting is crucial for effective policy-making, as ignoring non-monetary transactions can misrepresent economic health.