How the CPI basket conceals the inflation picture

GS Paper III Indian Economy

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The Consumer price index(CPI) basket in India is outdated and does not reflect the changing consumption patterns of Indians.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

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Thus, the CPI will continue to be based on outdated data for the next 2 years.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