As inflation pinches, govt mulls reducing food weighting in CPI. Here's why

The govt is exploring a reduction in food's weight in the Consumer Price Index to reflect changing consumption patterns and manage inflation, as food prices remain volatile and seasonally driven

The government is reportedly considering reducing the weight of food items in the Consumer Price Index (CPI) basket to address inflation concerns. The move follows findings from the Household Consumption Expenditure Survey (HCES) 2022–23, which highlighted a decline in household spending on food.

 

According to The Economic Times, the weightage of food items in the CPI basket could be reduced by up to 6.5 percentage points in rural areas and 3.4 percentage points in urban areas.

 

This proposal comes amid rising calls to adjust how food items impact inflation data. The 2023–24 Economic Survey suggested excluding food from inflation calculations, with Chief Economic Adviser V Anantha Nageswaran citing volatile food prices as a primary driver of inflation spikes. Removing highly volatile commodities like tomatoes, onions, and potatoes could reportedly lower retail inflation to 4 per cent.

 

Why does food dominate CPI in India?

 

Historically, food has been a dominant component of CPI in India for several reasons:

 

• A significant portion of household income, particularly in rural areas, has been spent on food.

 

• The agricultural base of India ties consumption patterns directly to food prices.

 

• Food prices are highly volatile, influenced by monsoon dependency and supply chain disruptions.

 

However, recent government initiatives, such as the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), have provided free rations to over 80 crore people, reducing the burden of food costs for many households.

 

A report by the Economic Advisory Council to the Prime Minister revealed a sharp decline in food’s share of household spending. In rural areas, it fell from 53 per cent in 2011–12 to 46.5 per cent in 2022–23. Urban areas saw a drop from 42.7 per cent to 39.2 per cent over the same period.

 

How food items impact inflation

 

Food and beverages currently account for 45.9 per cent of the CPI basket, with over 120 food items included. The weight differs between rural and urban centres:

 

• CPI-Rural: 54.2 per cent

 

• CPI-Urban: 36.3 per cent

 

In October, food inflation surged to a 15-month high of 10.9 per cent, pushing overall retail inflation to 6.2 per cent. The 2023–24 Economic Survey noted significant contributions to inflation from cereals (33.3 per cent), vegetables (30.6 per cent), spices (18.3 per cent), and milk (14.3 per cent).

 

Plans to update the CPI base year

 

Experts have called for updating the CPI base year, last revised in 2012, to reflect current consumption patterns more accurately. The government is reportedly considering 2024 as the new base year. Additionally, some outdated items like horse cart fares and video cassette prices may be removed from the index.

 

RBI’s stance on interest rates

 

The RBI has held the repo rate steady at 6.5 per cent since February 2023, citing the risks of premature rate cuts. RBI Governor Shaktikanta Das recently cautioned that a rate cut would be “very risky,” despite calls from the industry to reduce rates to spur growth.

 

Opposition criticism

 

The opposition has criticised the proposed exclusion of food items from the CPI basket. Congress leader Jairam Ramesh called it a “cruel joke,” accusing the government of manipulating data instead of addressing food price volatility.

 

"The prime minister's entire focus is not on reducing inflation, but on showing low inflation figures. The government is now concertedly attempting to manipulate the Consumer Price Index (CPI) and Wholesale Price Index (WPI) figures to show inflation as being under control, even as the ground reality is that the common man is facing non-stop price rise," Ramesh said in a statement.  (With inputs from PTI)