New Delhi: The retail prices, measured as the Consumer Price Index (CPI), have been hovering above the upper band of 6 percent as set by the government for the Reserve Bank under the law. In January, the CPI was 6.52 percent and it declined marginally to 6.44 percent in the last month. Nonetheless, it is still hovering above the RBI’s comfort zone of 6 percent as mandated under section 45ZA of the RBI Act of 1934.
Given the importance and impact of high inflation on the Reserve Bank’s strategy to battle inflation in the country, there is a growing demand to revisit the methodology used in calculating retail inflation in the country.
How the data for CPI is gathered?
India’s apex statistics body, the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI), collects the data from 1,114 urban markets and 1,181 villages spread across the country. The field staff of NSO visits these urban markets and villages on a weekly basis and collects the data.
For example, in the month of February 2023, the data was collected from all the urban markets and more than 98 percent of village markets. In case of market-wise price reporting, the coverage stands at more than 93 percent for urban markets and more than 90 percent for rural markets.
The retail prices that are collected by the field staff are then compared on a year-on-year basis which is the price data collected by the NSO field staff in February this year is then compared with the price data collected during the same month last year i.e. February 2022.
Composition of CPI basket in India
Indian authorities assign different weights to different items that are included in the country’s basket for measuring price movement. Moreover, the weight of these items also varies as per the rural and urban markets.
For example, food and beverages have 54.18 percent weight in the CPI-rural basket while the weight of food and beverages in the CPI-urban basket is just 36.29 percent, and the weight of these products in the combined basket is 45.86 percent.
There are different items such as cereals and products made of cereals, fruits, vegetables, meat and fish, egg, milk and milk products, oils and fats, pulses, spices, and confectionary, which are essential day-to-day use food items and non-alcoholic beverages and prepared meals and snacks and sweets, etc.
In addition to this food and beverages, other products and services that are measured in the CPI basket are footwear, clothing, fuel, light, household goods and services, health, transport and communication, education, personal care effects, recreation, and amusement among other things.
While in the combined CPI basket (rural and urban), food and beverages have a weight of 45.86 percent, clothing, and footwear have a weight of 5.58 percent and 0.95 percent respectively. Housing expenses are not calculated for rural consumers while for urban consumers they have a weight of over 10 percent. Fuel and light have a weight of 6.84 percent.
Miscellaneous expenses such as household goods and services, health, transport and communication, education, personal care effects, recreation, and amusement among other things have a weight of 28.32 percent.
Why retail inflation remains high?
A scrutiny of items in the country’s consumer price index basket reveals that nearly half of the weight is assigned to food and beverages while miscellaneous items including education and transportation account for 28 percent of the weight in the basket. If food prices, which include cereals, pulses, oils and fats, milk, fruits, and vegetables, rise then it has a greater impact on the Consumer Price Index.
Actual expenditure vs disproportionate weight in CPI
Miscellaneous expenses such as household goods and services, health, transport and communication, education, personal care effects, recreation and amusement among other things have a weight of 28.32 percent.
Transportation and education, two categories where urban households spend a considerable amount, only account for 13 percent weight in the basket while housing, another sizeable expenditure in urban areas, has a weight of only 10 percent.
While housing has a weight of just 10 percent in the combined CPI basket, the expenses on milk, milk products, fruits, and vegetables have a weight of over 15 percent in the combined basket even if the actual expenses on these items would be considerably less in comparison with the rent paid by urban consumers in cities and metros.
Similarly, education has a weight of 3.46 percent in the CPI-rural basket and 5.62 percent in the CPI-urban basket with a combined weight of less than 5 percent in the CPI basket whereas urban families actually spend a considerable part of their income in paying the school fees and other non-tuition fees related expenditure of their wards.
These huge disparities between the actual expenditure incurred by the rural and urban consumers and their respective weights in the CPI basket have often led to the demands for revisiting the methodology used in calculating the retail inflation in the country.
Similarly, the composition of the CPI basket and the respective weight assigned to different items and expenses also attracts a lot of debate. For example, Indian consumers, both in urban and rural areas, are spending a lot of money buying smartphones, smartwatches, and other electronic items but the money spent on the purchase of these items has not been included in the CPI basket.
State Bank of India’s Group Chief Economic Advisor Soumya Kanti Ghosh says that in the Indian context, much of the data collated for inflation calculation has innate structural issues, distorting the figures by over-reliance on select non-essential parts or not factoring the changing contours of manufacturing and services.
