The country today moves to a new consumer price index that includes services and is likely to help govt improve policymaking.
As policymakers grapple with rising prices ahead of the Budget later this month and monetary review in March, a new set of retail price data, to be unveiled on Friday, could provide the government and the Reserve Bank of India (RBI) better insight to focus measures on. For the first time, a consumer price index will be introduced for the entire country.
Most advanced nations base their policies on retail price inflation, but India uses wholesale price inflation, because the lag in the latter is less than consumer price indices, which are largely segmental.
The new Consumer Price Index (CPI) promises to be superior to the wholesale price index (WPI) as well as the current three consumer price indices.
It will have an edge over WPI since it would also cover services.
The index would cover not just a segment, but the entire population of India, and will be released with a lag of just 15 days. This will make its tracking easier than the current consumer price indices (see table).
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The new CPI aims to capture consumption price, both at urban centres and rural areas of the country, along with all-India numbers.
Finance Minister Pranab Mukherjee said: “In order to fully understand and respond to the inflation dynamics, it is vital that we have a good market intelligence system and a robust and timely data on prices. The initiative in compilation of CPI Urban, CPI Rural and CPI combined for all states and Union territories and, at the national level, by covering all sections of the urban and rural population, is an important step in improving inflation management in the country.”
Consumer price indices for industrial workers (CPI-IW) as well as agricultural (CPI-AL) and rural labourers (CPI-RL) are mostly sectional data, focusing on a particular segment of the population. CPI-IW is a price index of items consumed by industrial workers, CPI-AL for agricultural labourers, while CPI-RL is for rural labourers.
Chief statistician of India T C A Anant told Business Standard that the new CPI would be more representative of the changing consumption pattern. It will have a commodities basket with number of items not less than the present CPIs, if not more.
The revised WPI covers 676 items, CPI-IW has 320 items, while CPI-RL and CPI-AL have 260 items.
The new CPI will have the same broad categories as in the current retail price indices – food, beverages and tobacco, fuel and light, clothing, bedding and footwear, housing and miscellaneous.
The miscellaneous category, which mainly includes services, will have 26.31 per cent weight in the new index. Food and associated items will still have the highest weight, of 49.71, compared to just over 24 per cent in WPI, including those categorised as manufacturing products.
At present, government policies are not based on one single index, but a number of indices — each of which has a specific purpose. While CPI-IW is used for calculating dearness allowance of organised sector workers, CPI-AL helps determine model agricultural wages. WPI is largely used for formulation of macroeconomic policies.
The existing consumer indices, in different stages of review, will continue to coexist with the new CPI.
“Though the idea behind the new index is to gradually make it an important policymaking tool, it does not mean that other numbers would not be released,” Anant said.
In the new index, weights are based on the report of the National Sample Survey Organisation (NSSO) on consumption pattern for 2004-05, while the base year would be 2010. WPI series was also revised last year, taking 2004-05 as the base year.
However, the current CPI indices follow a very old format. While CPI-Al and CPI-RL take 1986-87 as the base year, the base year for CPI-IW is 2001.
Wages under programmes like the National Rural Employment Guarantee Scheme (NREGS) is linked to CPI-RL and dearness allowance for central government employees is linked to CPI-IW.
The Department of Statistics, which is creating the framework for the new data, has taken help from the Department of Posts for collection of information on a regular basis.
| THE NEW YARDSTICK | |||||
| Title | CPI-IW | CPI-AL | CPI-RL | WPI | NEW CPI* |
| Base | 2001 | 1986-87 | 1986-87 | 2004-05 | 2010 |
| Lag** | 1 month | 18 days | 18 days | 14 days | 15 days*** |
| Elementary items | 320.00 | 260.00 | 260 | 676.00 | Not to be less than current CPI |
| Weight of food products (%) | 48.47 | 69.15 | 66.77 | 24.30 | 49.71 |
| Weight of energy products (%) | 7.43 | 8.35 | 7.9 | 14.91 | 9.49 |
| Weight of miscellaneous items, which primarily include services (%) | 23.26 | 11.73 | 11.87 | Services not included | 26.31 |
| No of collection centres | 78 urban centres | 600 rural centres | 600 rural centres | Centralised collection | 1,181 villages and 310 towns |
| Note: Weights do not include all categories * The new CPI will comprise consumer price index for urban areas, for rural areas, and a combination of both; ** Days since the end of the reference month; *** The statistics & programme implementation ministry aims to release the new CPI with a lag of 15 days. Source: Statistics & programme implementation ministry, commerce ministry and labour ministry | |||||
“Department of Posts has a wide reach in terms of access to public and we wish to effectively use their services for collection of data on a regular basis, particularly for rural areas,” Anant said, adding that almost 80 per cent compliance level had been reached among his staff for timely release of the data.
“This CPI will have more institutional support than the current ones. We have created an innovative mechanism for data handling and the staff here are currently being trained,” he added.
Crisil Principal Economist D K Joshi said it made a lot of sense to frame policies on the basis of the new CPI, since movement in retail prices was more relevant and WPI did not cover the entire range.