The long-pending exercise of revising the base of consumer price index (CPI) is still some time away and will be taken up only once the latest round of Household Consumer Expenditure Survey is completed, government sources said.
The Household Consumer Expenditure Survey 2022-23 was launched in August last year and will be conducted for a one-year period. The detailed survey, which is conducted by the National Statistical Office, is used for getting data on the budget and spending patterns by household for several commodities and services, which is then used for compilation of consumer price indices for rural and urban India.
In addition, statistical indicators of level of living, social consumption and well-being, and inequalities will also be compiled from the data collected in the survey.
According to sources, once the survey is completed, it would take about six to eight months for the results to be compiled. A decision would then have to be taken on when the exercise of revision of the CPI base should be initiated. “All these are complex issues and would take a fair amount of time,” said a source. While there is no exact timeline for the exercise, it is unlikely to be started before the middle, if not towards the end, of 2024.
A revision of the base of the CPI index, which provides data on retail inflation, would provide more updated information on the actual impact of price rise on households and would help the government and the Reserve Bank of India improve policy and decision making. CPI inflation is used by the RBI for inflation targeting and setting policy rates and also helps industry and government decide on a variety of other policies including real wages.
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At present, the CPI is based on the average monthly consumer expenditure of urban and rural household obtained from data of the 68th round Consumer Expenditure Survey (CES) conducted during 2011-12. The CPI, with base year 2012, was effective from January 2015 and broadly covers six major groups, including food and beverage; pan, tobacco and intoxicants; clothing and footwear; housing; fuel and light and miscellaneous items, with a total of 299 goods and services.
A base revision of indices, including for GDP, index for industrial production and retail inflation is recommended on a five-year basis. Earlier, the government had planned to change the base year for calculation of GDP and retail inflation to 2017-18 and 2018 respectively, which was likely to come to effect by 2019-20. However, this exercise was never completed. The government had junked the 2017-18 CES on the ground of data quality issues and incorrect methodology.
Experts point out that the CPI basket and base year is outdated and often does not reflect the true consumption patterns of households.
“It is well known and documented that the consumption basket of the households undergoes a significant change in a span of about five years. The CPI basket may have become outdated and continues to track commodities which are not consumed in the same amount,” said Sunil Sinha, principal economist, India Ratings and Research, pointing out that for instance, the urban consumption basket is now more tilted towards processed food. The price of wheat flour would be more important for urban households than the price of wheat and often there is a variance between the two, he noted.
The food basket has a weight of 36.29% in urban retail inflation, which may be on the higher side as urban households now tend to spend more on services relating to health and education. A review of items like horse cart fare, VCR and DVD players and audio -video cassettes that are not so frequently in would also have to be done.
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NR Bhanumurthy, vice-chancellor of Dr BR Ambedkar School of Economics University said the household consumer expenditure survey will give an idea of what items needs to be included and removed and the government will have to decide on a base year and then work on the items and services to be included.
“Giving the correct weightage would be the most important part of the exercise and this would be based on the CES,” he said. The service sector could see an increase in the weight in the CPI basket given that people now consume more digital services.
A recent study by India Ratings had revealed that retail inflation does not affect all households in the same way because the consumption baskets of households belonging to different expenditure strata vary. The study based on CES 11-12 found that the effective inflation faced by the bottom 50% of the population (both in rural and urban areas) at 7.2% was 40 basis points higher than the headline retail inflation during the nine months of FY23.
Meanwhile, a separate exercise is already underway by the Department for Promotion of Industry and Internal Trade to update the base year of the wholesale price index to 2017-18 from 2011-12.
