The government is seeking feedback on how to incorporate food grains distributed through the Public Distribution System (PDS) into the Consumer Price Index (CPI) series. The Ministry of Statistics and Programme Implementation (MoSPI) has released a discussion paper to gather opinions from experts, academicians, government organizations, state governments, financial institutions, and the public. Interested parties can submit their views and suggestions until October 22.
This initiative stems from the ongoing revision of the CPI base year, which is being updated to 2024, using data from the Household Consumption Expenditure Survey (HCES) conducted in 2022-23. The current base year is 2012. The revision aims to capture shifts in household consumption patterns and ensure they are accurately reflected in inflation figures.
A key challenge in this revision is how to account for free food grains provided under the National Food Security Act (NFSA). Since January 1, 2023, the government has been providing free food grains to beneficiaries of the Antyodaya Anna Yojana (AAY) and Priority Households (PHH) categories. This raises questions about whether these free PDS items should be included in the CPI basket and how to address price changes (from positive to zero or vice versa) during an ongoing series.
MoSPI has identified two main issues: how to handle price reductions or increases of PDS items during an ongoing series, and whether free PDS items should be included in the CPI basket at the beginning of a series. The ministry is exploring the creation of a single commodity index that combines PDS prices (which may be zero or subsidized) with open market prices, weighted by consumption categories. Under this approach, free items would be treated as having a zero price, allowing the impact of free distribution to be captured in inflation estimates.
The proposed methodology has been discussed with experts from the International Monetary Fund (IMF), who believe it would accurately reflect price changes, even if nominal prices are introduced for PDS products. The IMF expert noted that the method would not overstate or distort price changes.
Currently, the CPI includes four PDS items—rice, wheat, sugar, and kerosene—but their combined weight is only 0.9% of the overall CPI basket, which consists of 299 items. The "cereals and products" sub-group currently holds a 9.7% weight in the CPI basket. However, the revamped HCES 2022-23 may reduce this sub-group's weight to 4-5%, which would also reduce the weight of PDS items.
Including PDS items in the CPI calculation is not expected to significantly alter the headline inflation reading because their prices are generally not volatile. According to a former MoSPI secretary, the volatility in the food basket primarily comes from vegetables, pulses, and other items. Additionally, free distribution represents a small percentage of total consumption, with cereals being the only category where PDS has a significant share. However, cereals' share in overall consumption has decreased, further limiting the potential impact on new CPI readings.
The government's initiative to seek views on including PDS food grains in the CPI series reflects its commitment to accurately measuring inflation and ensuring that the CPI reflects current consumption patterns. By engaging with experts and stakeholders, MoSPI aims to develop a robust and effective CPI that informs economic policy decisions. India's retail inflation edged up to 2.1% last month.
