Context: The Ministry of Statistics and Programme Implementation (MoSPI) has floated a discussion paper in a process to revise the base of Consumer Price Index (CPI).
Relevance of the Topic: Prelims: Key aspects about the Consumer Price Index (CPI).
Major Highlights of the discussion paper:
- Objective: To revise the base year of CPI by updating weights and basket of CPI by introducing possible improvements in methodology of CPI compilation.
- Contention on PDS and free social transfers in context of CPI: The Ministry highlighted two major challenges in free distribution of PDS (Public Distribution System) items in context of CPI compilations:
- Mid Series Adjustments: How to address the reduction in the price of PDS items from positive value to zero or increase in price of PDS items from zero to some positive amount during an ongoing series?
- Inclusion in CPI basket at start of series: Should the free PDS items (which involve no out of pocket expenditure) be included in CPI basket or not remains a challenge.
Challenges of including Free items in CPI
- Various states and UT distribute various items like Kerosene in PDS for free of cost, which poses a challenge in calculation of such items as the out of pocket expenditure is zero for such items.
- Existing norm- Such goods are assigned with the value of zero. Therefore, these items are effectively excluded from the CPI basket.
- IMF recommendation- International Monetary Fund suggests excluding such items from the index as the index should be restricted to monetary transactions only. Further, such transactions should be ignored as they do not generate any demand for money.
- Thus, including free items in CPI could underestimate inflation, while their exclusion might fail to reflect actual consumption patterns of households.
Suggestions given in the discussion paper:
The discussion paper suggests three methods to deal with free PDS items:
- Zero value allocation- This method suggests that zero price to be allocated to items and adjusting the weight during the next update. (Method is proposed for next series of CPI)
- Redistribution of weight- Method suggests that the weight of items of such items in PDS to be redistributed as other items within the class or section. (Method is used in existing series)
- Redistribution across basket- Third method suggests redistribution of weight broadly over all items of basket.
About Retail Inflation Index in India
- Consumer Price Index or CPI is the market basket index used to calculate the retail inflation in the country.
- RBI uses CPI (Combined) with base year 2012 to calculate the inflation. CPI (Combined) takes into account price changes in both urban and rural areas.
- Base year is a reference year to calculate the value of goods.
About Public Distribution System
- PDS is a government led initiative designed to distribute food grains and essential commodities to economically weaker sections.
- Key objectives: Ensuring food security, stabilising food prices and reducing poverty.
- Notable schemes:
- Antodaya Anna Yojana for the poorest of the poor households with heavily subsidised food grains.
- National Food Security Act 2013 covers 65% of the population of the nation, ensuring their Right to Food.
Conclusion: CPI calculation is a barometer for the inflation in the nation, helping India to calculate its real growth prospects. To address the challenges in the calculation, the suggestions of the experts and agencies like the International Monetary Fund need to be incorporated.