Base Year Review of the CPI: MOSPI presents a discussion paper on the treatment of elements of the PDS and other free social transfers

Do we have to take free social transfers, as well as grains provided under the public distribution system, into account when calculating retail inflation in India? This is the question facing the Ministry of Statistics as part of its efforts to review the base year of the CPI, update the weights for the various items in the CPI basket, and potentially improve the aggregation methodology.

The CPI is an important economic data and is used as the primary price setting indicator by the Monetary Policy Committee of the Reserve Bank of India, used as a deflator for GDP reflecting real economic growth as well as an indicator of wages. Adjusting income tax brackets and social security payments.

Accordingly, the Ministry of Statistics has now sought the views and suggestions of users, experts, academics, government and state organizations, financial institutions and the public at large on the “treatment of free PDS elements in the compilation of CPIs”.

At present, the base year for the CPI is 2012, which is now revised to 2024. The weights and basket of items will be drawn from the Household Expenditure Survey (HCES) 2022-23.

“The challenge of addressing freely distributed PDS elements in the compilation of CPIs has been focused on while implementing a new integrated food security scheme under the National Food Security Act (NFSA),” the ministry said, adding that from January 1, 2023, the central The government started this scheme to provide free food grains for one year to beneficiaries under Antyodaya Anna Yojana (AAY) and Priority Households (PHH) categories.

There are two challenges in free distribution of PDS items in the context of compiling CPIs. This includes mid-series adjustments when the price of some PDS items decreases or increases in a continuous series as well as inclusion in the CPI basket at the beginning of the series and whether free PDS items will be included in the CPI basket. The next version is to free distribution of some items in the PDS to derive weights and include them in the CPI basket for the new series of CPI.

At present, in the State/Union Territories where the system of free distribution to all sections of society is implemented, the weights of these items are distributed proportionately to the other items of the division within the State/UT. “However, concerns have been raised over the approach used to incorporate this free distribution into the compilation of the CPI. The method adopted does not accurately reflect the impact of free foodgrains distribution on inflation,” the ministry noted.

Stakeholder opinions have been requested by January 15, 2025.

As part of the essential review process, the Ministry is also working on several amendments to enhance the strength and relevance of the new series.

“These updates are intended to be consistent with the latest technological developments and reflect recent changes in consumption patterns. The fundamental review of the CPI is a comprehensive and detailed process through which all existing processes and methodology will be reconsidered with a view to potential improvements,” he said, adding that the compilation methodology will be developed alongside Along with the software again to incorporate the required changes.