The CPI Base Revision Exercise Measures a Slice of Life

India’s ongoing CPI (Consumer Price Index) base revision from 2012 to 2024 reflects structural changes in consumption patterns and the economy.

• Inflation directly affects household budgets, making the CPI a critical economic indicator for tracking changes in the living patterns.

About the “Shopping Basket” Concept

• Defining the Basket: CPI is explained through a “shopping basket” metaphor, containing items an average Indian family buys, such as food, rent, and petrol.
• Tracking Prices: The index measures whether the prices of these specific items are rising or falling to gauge inflation, often described as “taxation without legislation” because it increases costs for the same goods without a formal tax law.
• Weightage: Not every item in the basket is equal.
  • Example: A rise in house rent or petrol prices can have a much larger impact on a family’s budget than a rise in the price of salt.
  • Consequently, different items are assigned different “weights” based on their importance in a typical budget.

Reasons for revision of the 2012 Base year

• Lifestyle Shifts: In 2012, digital services such as 4G data, Netflix, Zomato, Swiggy, and online classes did not exist or were not yet prevalent.
• Urbanisation: The expansion of cities and changes in online shopping habits mean that a 2012-based index cannot accurately reflect the realities of 2024.
• Evolving Consumption Patterns: As households move beyond the basic needs of food, clothing, and shelter to include travel, data packs, and digital subscriptions, consumption priorities have diversified.
  • Based on the Household Consumption Expenditure Survey (2023–24), the revised CPI weightages will reflect current consumption patterns and changing spending priorities.

Economic Principles and Adjustments

• Engel’s Law: The revised weights reflect Engel’s Law, as rising incomes reduce the proportion spent on food and increase spending on services.
• Weightage Re-balancing: The new Consumer Price Index (CPI) will give greater weight to education, health, and services, while reducing the weight of staple foods like rice, based on data from the Household Consumption Expenditure Survey (HCES).
  • This adjustment aims to reflect changing consumption patterns and economic conditions, particularly in light of the COVID-19 pandemic.
  • The revised CPI will be influenced more by changes in item weights than by the base year, potentially reducing inflation volatility.
• Modernising Items: Outdated items like landline phones are being replaced in the basket by mobile data and broadband.

Technological Upgrades in Data Collection

• From Manual to Digital: Previously, data was collected manually in registers, leading to errors and delays.
  • The 2024 series uses CAPI (Computer-Assisted Personal Interviewing), a data-collection method in which interviewers use tablets or computers to conduct face-to-face interviews.
• Online Price Capture: For items like airfare and telecom plans, prices will now be captured directly from online portals rather than through traditional manual surveys.
• Government Sources: Prices for regulated services such as railway tickets, postal charges, and fuel will be set directly by the government.

Significance of the Revision

• Monetary Policy: The RBI relies on CPI data to set interest rates and keep inflation within its 2–6% target range. Accurate data ensures rates are not set based on incorrect measurements.
• Salaries and DA: The Dearness Allowance (DA) for government employees is linked to CPI; therefore, correct measurement ensures fair salary adjustments.
• Global Standards: Moving to a 2024 base aligns India with IMF and World Bank guidelines, making it easier to compare Indian inflation with that of global economies such as the US and Europe.

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Conclusion

Despite revisions to the basket, weights, and data sources, the CPI retains its core purpose of capturing price changes from a household’s perspective, ensuring comparability over time while enhancing its reliability and policy relevance.