Should free social transfers as well as foodgrains supplied under the public distribution system be taken into account in the calculation of India’s retail inflation? This is the question facing the Ministry of Statistics, in its effort to review the base year of the Consumer Price Index (CPI), as well as update the weightings of the different items in the basket of the CPI and possibly improve the compilation methodology.

The CPI is an important economic data and is used as the main indicator for setting rates by the monetary policy committee of the Reserve Bank of India, its use as a GDP deflator that reflects real economic growth, as well as a reference point for indexing wages, adjusting income tax brackets and social security payments.

Accordingly, the Ministry of Statistics has now sought views and suggestions from users, experts, academicians, government organizations, state governments, financial institutions and the general public on the “handling of free PDS items in the compilation of the “CPI”.

The CPI base year is currently 2012, which is now being revised to 2024. The weights and basket of items will be derived from the Household Consumption Expenditure Survey (HCES) 2022- 23.

“The challenge of addressing freely distributed PDS items in the compilation of the IPC came into focus with the implementation of a new integrated food security scheme under the National Food Security Act (NFSA), the ministry said, and added that from January 1, 2023, the Central The government started this scheme to provide free food grains for one year to the beneficiaries of Antyodaya Anna Yojana (AAY) and Household categories priority (PHH).

There are two challenges in the free distribution of PDS items in the context of CPI compilation. These include mid-series adjustments when the price of certain PDS items is reduced or increased in an ongoing series, as well as inclusion in the CPI basket at the start of the series and if free PDS items are must be included in the CPI basket. The next issue is the free distribution of certain items in PDS for derivation of weights and inclusion in the CPI basket of the new CPI series.

Currently, in the State/UT where the free distribution regime is implemented for all sectors of society, the weights of these items are distributed pro rata to the rest of the elements of the section within the ‘State/UT. “However, concerns were raised about the approach used to incorporate this free distribution into the compilation of the CPI. It was argued that the method adopted does not accurately capture the impact of free distribution of food grains on inflation,” the ministry noted.

It has requested views from interested parties by January 15, 2025.

As part of the base revision exercise, the ministry is also working on various modifications to improve the robustness and relevance of the new series.

“These updates are intended to align with the latest technological advances and reflect recent changes in consumption patterns. The review of the CPI Base is a comprehensive and detailed exercise in which all existing processes and methodology will be reviewed with the target of possible improvements,” he said, adding that the compilation methodology along with the software will be redeveloped to incorporate the necessary changes. .