Context:
The Consumer price index(CPI) basket in India is outdated and does not reflect the changing consumption patterns of Indians.
About Consumer Price Index:
- The CPI is a measure of inflation that tracks the prices of a basket of goods and services.
- It is a comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy.
- In the current CPI (base year 2012), weights of various groups are as follows: food and beverages (45.86); paan, tobacco and intoxicants (2.38); clothing and footwear (6.53); housing (10.07); fuel and light (6.84); miscellaneous (28.32).
Issues with the current CPI:
- Evolving Basket: The CPI basket is evolving with change in the consumption habits of the common people.
- Highest Weightage Assigned to Food and Beverages: The existing CPI, based on the 2012 base year, assigns highest weightage to food and beverages (45.86%) . Contrary to this, Indians are spending a decreasing proportion of their income on food.
- Inflationary Impact of TOP Vegetables: Tomatoes, onions, and potatoes have a disproportionately higher impact on inflation, indicating that their assigned weight in the CPI should be lower.
- Issue of Assigning High Weightage to Cereals: The changing dietary habits have reduced the relative expenditure on cereals and the schemes like PMGKY have significantly reduced cereal expenses for a large segment of the population.
Engel’s Law:
- As per the law, as the economy grows, the proportion of income spent on food decreases, despite the absolute expenditure on food rising.
- These shifts imply that as people’s income rises, they tend to allocate a larger proportion of their spending towards non-food items such as housing, education, healthcare, personal care, entertainment, and digital services such as the Internet.
- This reflects a general improvement in living standards and a broadening of consumer demands
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Issues with with Consumption Expenditures Survey (CES):
- The Ministry of Statistics and Program implementation (MoSPI) is conducting a household consumption expenditures survey to collect data on the consumption patterns of Indians. However, the CES will not be completed until 2024.
- Thus, the CPI will continue to be based on outdated data for the next 2 years.
- It raises questions about the accuracy of measuring the cost of living and economic well-being.
- The population below the poverty line cannot be determined accurately, and the ability to effectively track inflation has been significantly undermined.
Way Ahead:
- Increase in Frequency of CES: MoSPI needs to take steps to address the outdated CPI basket by increasing the frequency of the CES.
- Improving Data Processing Capabilities: MoSPI should improve its data processing capabilities so that the results of CES can be released more quickly.
- Updation of Basket: CPI basket should be updated every 5 years to reflect changes in consumption patterns.
- Reducing Weightage of Food: weight of food in the CPI basket should be reduced to reflect the fact that Indians are spending a decreasing proportion of their income on food.
Conclusion:
- The CPI is used to make important decisions about monetary policy, government spending and spouse social welfare programs.
- In a rapidly evolving digital economy, the data collection and inflation estimation methods must adapt and evolve in parallel to accurately reflect the realities of modern-day consumption and living.
- Therefore, it is crucial for the MoSPI to promptly address these gaps and prioritize efficient data processing.
News Source: The Hindu
13 Jul 2023
