The statistics ministry last week unveiled India’s new consumer price index (CPI) series, which is a significant upgrade over the one it replaced and is part of a massive two-year effort to update important macroeconomic data.
Indian households’ consumption patterns are now more accurately reflected in the CPI’s base year, methodology, and coverage. 2024 is now its base year, which is far more recent than the 2012 base year of the previous series.
In accordance with the results of the 2023–24 Household Consumption Expenditure Survey (HCES), its basket of products whose retail prices are monitored has been rearranged. The weights given to different products now much more accurately reflect national spending trends.
Think about it. India’s GDP was worth just $1.83 trillion in 2012. By 2024, it was $3.91 trillion. Nevertheless, retail inflation figures were based on an antiquated basket, even though our GDP more than doubled and our per capita income increased by about 90%, from $1,429 in 2012 to $2,695 in 2024. It is a comfort that this fixed.
The CPI’s count of data collection stations has increased along with the number of items. The weight of food items has decreased from about 46% to less than 37% in the new series, which is the biggest change.
As wealth increases and income levels rise, individuals spend more on other things, including transportation, health care, and education, and less on food. The new series takes this reality into account.
Comparisons between the old and new series’ inflation figures are inevitable. According to the latter, retail inflation was 2.75% in January compared to 1.33% in December. That gap tells us little about the adjustments made.
It would be of academic rather than policy importance to calculate historical statistics using new weights and a “linking factor” provided by the ministry.
Whether the CPI update aids in improved policy formulation is what counts. Obviously, the answer is “yes.” Policymaking based on intuition, which frequently occurs when trustworthy data is unavailable, is inferior than evidence-based policymaking.
The CPI reset would aid in better calibrating monetary and fiscal policy since revised data reflects current consumption patterns and economic conditions, according to India’s Chief Economic Advisor V. Anantha Nageswaran.
There is currently expectation that headline inflation will be more stable as erratic food prices lose weight in the CPI basket. We can anticipate that this update will benefit us more to the degree that shortages are driving up food prices because monetary policy is more successful at handling demand shocks than supply shocks.
The quality of the underlying measure that a policy is based on determines its effectiveness. Of course, we could use an even more sensitive inflation tracker. For instance, we might be able to employ a “chain-weighted” basket for dynamic readings if we see more regular purchasing trends from sources other than the HCES. However, the current system provides conceptual continuity.
India’s central bank will be able to better target inflation in order to fulfill this aspect of its mandate as long as it provides a more realistic view of the price situation. The statistics ministry must continue with its strategy of updating the base year of important economic indicators every three to five years rather than ten.
In an economy that is expanding quickly, structural changes are unavoidable. If economic data does not account for these changes, policymaking and, consequently, results suffer.
