CPI base year revision: MOSPI floats discussion paper on treatment of PDS items & other free social transfers

Should free social transfers as well as grains supplied under the public distribution system be factored into India's retail inflation calculation? This is the question that the statistics ministry is grappling with, in its effort to revise the base year for the Consumer Price Index (CPI) as well as update the weights for different items in the CPI basket and possible improve the methodology of compilation.

The CPI is important economic data and is used as the primary indicator for setting rates by the monetary policy committee of the Reserve Bank of India, its use as a deflator for GDP that reflects the true economic growth as well as a benchmark to index wages, adjust income tax brackets and social security payments.

Accordingly, the ministry of statistics has now sought views and suggestions of the users, experts, academicians, government organisations, state governments, financial institutions and the public at large on the ‘treatment of free PDS items in CPI compilation’.

At present, the base year for the CPI is 2012, which is now being revised to 2024. Weights and item basket will be derived from Household Consumption Expenditure Survey (HCES) 2022-23.

“The challenge of addressing freely distributed PDS items in the CPI compilation came into focus with the implementation of a new integrated food security scheme under the National Food Security Act (NFSA,” said the ministry, adding that from January 1, 2023, the Central Government initiated this scheme to provide free food grains for one year to beneficiaries under the Antyodaya Anna Yojana (AAY) and Priority Households (PHH) categories.

There are two challenges in the free distribution of PDS items in the context of CPI compilation. These include mid-series adjustments when the price of certain PDS items reduces or increases in an ongoing series as well as inclusion in CPI basket at the start of series and whether the free PDS items be included in the CPI basket. The next issue is free distribution of certain items in PDS for derivation of weights and their inclusion in the CPI basket of the new series of CPI.

At present, in the State/UTs where free distribution scheme is implemented for all sections of the society, the weights of these items are pro-rata distributed on the other items of the section within the State/UT. “However, concerns were raised regarding the approach used to incorporate this free distribution in the CPI compilation. It was argued that the adopted method doesn’t accurately capture the impact of free food grain distribution on inflation,” the ministry noted.

It has sought views from stakeholders by January 15, 2025.

As part of the base revision exercise, the ministry is also working on several modifications to enhance 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 Base revision of CPI is a comprehensive and detailed exercise in which all the existing processes and methodology will be revisited with the objective of potential improvements,” it said, adding that the compilation methodology along-with software will be developed afresh to incorporate requisite changes.