The Consumer Price Index (CPI) is one of the most important indicators for measuring inflation, influencing monetary policy decisions, welfare schemes, and cost-of-living adjustments. Recently, the Ministry of Statistics and Programme Implementation (MoSPI) has proposed a significant revision in the methodology for calculating CPI, particularly in the housing component. The aim is to make the index more representative of real living conditions across both urban and rural India.
Background
Currently, housing has a weight of 21.67% in the urban CPI and 10.07% at the all-India level. However, this component is derived primarily from urban rental data and, in several cases, uses the House Rent Allowance (HRA) of government employees as a proxy for rent levels. Economists have pointed out that this approach fails to capture actual rental movements in growing smaller towns and does not account for rural housing dynamics, where ownership and imputed rent patterns differ significantly.
Key Proposed Changes
1. Inclusion of Rural Housing Data
For the first time, the CPI housing index will incorporate rental data from rural areas. This shift is based on the Household Consumption Expenditure Survey (HCES) 2023–24, which includes both actual rent paid and imputed rent for owner-occupied homes. This is important because rural India reports high home-ownership but also experiences value changes in housing that must be reflected in inflation estimates.
2. Exclusion of Employer-Provided Accommodation
Rent data from government or employer-provided dwellings will no longer be used. In such cases, HRA depends on administrative pay scales rather than the market rental environment. Their inclusion was leading to distorted inflation signals, particularly in metropolitan centers.
3. Monthly Rent Data Collection
The present methodology collects rental data only once in six months, leading to delayed or smoothed inflation readings. Under the revised framework, rent data will be collected monthly from all selected dwellings, improving the timeliness and sensitivity of the housing index.
4. Expanded Sampling and Global Best Practices
The revised framework draws on technical guidance from IMF experts, emphasizing panel-based rent tracking to maintain month-to-month comparability. This will reduce volatility and ensure a more stable and representative inflation measure.
Significance of the Reform
- Enhances accuracy and responsiveness of CPI to real housing market changes
- Improves representation of small towns and rural households
- Strengthens economic planning and monetary policy calibration
- Aligns India’s inflation measurement approach with global statistical standards
Conclusion
MoSPI’s revision to the CPI housing framework marks a major step toward inclusive and evidence-based inflation measurement.
By reflecting actual housing costs across diverse regions, the new methodology is expected to improve policy outcomes, welfare targeting, and the credibility of India’s inflation statistics.