Is India overestimating inflation as it is skewed to food and beverages?

The work on appropriate weights of various items could be completed once the household consumption expenditure survey is out

It is often argued the bump in the retail price inflation rate in July was due to the outdated priority given to food and beverage items in the consumer price index (CPI), which is based on the household consumption expenditure survey of 2011-12.

This is evident from the fact that while the wholesale price index (WPI) rate in food items rose higher, at 14.25 per cent, in the month than its equivalent in the CPI, at 11.51 per cent, the overall WPI rate was minus 1.36 per cent whereas the CPI was 7.44 per cent.

This was due to the fact that food articles constituted 15.26 per cent of the WPI, while they accounted for 39.06 per cent in the CPI. Beverages and food items together have a weighting of 45.86 per cent in the CPI.

The case for appropriate weighting for food and beverage items cannot be rested against the backdrop of the situation in July alone because it is true that when food and beverage prices were low they dragged down the overall rate of retail inflation much more than it ought to be.

Not going too far back in time, just in June the retail food and beverage inflation rate was just 4.63 per cent, which dragged down the overall inflation rate to 4.87 per cent despite core inflation (non-food, non-fuel) being at 5.4 per cent.

Food inflation as we saw above drove overall inflation higher next month despite the core inflation rate coming down to 5.12 per cent.

In August, the overall retail inflation rate declined to 6.83 per cent even as the core inflation rate eased moderately to 5.06 per cent. This was largely due to the food inflation rate falling to 9.94 per cent.

Work on appropriate weighting for various items can be completed once the household consumption expenditure survey is out. The government had earlier junked the survey for 2017-18, because of which the weighting could not be reworked. Now, the survey for 2022-23 (July-June) is expected this calendar year. In parallel, the survey for 2023-24 is also on. However, revising the CPI takes time after the survey comes out.

The CPI was revisited only once after its launch in the base year of 2010, based on the consumption expenditure survey of 2009-10. The current index is based on the base year of 2012, which revised the weightings of food and beverages in the CPI to 45.86 per cent from 47.58 per cent.

If one looks at international comparisons of weightings given by various countries, the ones assigned by India do not look too outdated. Per capita income could be an important yardstick since consumption of food and beverages goes down in the expenditure of people once their income rises.

The comparison of India with Brazil, Turkey, Mexico, and South Africa may not be appropriate since India has a per capita income, on the basis of purchasing power parity, way down in dollar terms than that for these four countries.

For instance, Brazil’s per capita income, at $17,260, is double India’s, at $8,210, in 2022, according to the World Bank data. South Africa’s is a bit less than Brazil’s at $15,570, while Mexico is higher at $21,060 and Turkey way up at $36,920. These four countries have assigned weightings to food and beverages in the range of 15-26 per cent in their CPI.

As such, India may not assign so low weightings to food and beverages in the CPI.

If one looks at Bangladesh, its per capita income is a bit lower at $7,690 than India’s and probably with similar consumption expenditure. It has given 59 per cent to food, beverages, and tobacco in its CPI. India has given 48.24 per cent to these items, adding tobacco to food and beverages.

As such per capita income is one parameter for assigning weighting but not the only factor. The others may be how the income is distributed among the people of the country concerned as well as their consumption behaviour.

S Mahendra Dev, former director of the Indira Gandhi Institute of Developmental Research (IGIDR) and chairman of the Commission for Agricultural Costs and Prices (CACP), says the weighting of food is higher in CPI-inflation in India than in other countries because the consumption expenditure survey hasn’t been updated since 2011-12.

“The next survey for 2022-23 is due to be submitted by December and it would definitely bring down the weighting of food (and beverages) in the CPI below 40 per cent though in rural areas it might be still higher. This is a realistic and accurate representation of the impact of food prices on the CPI.”

Madan Sabnavis, chief economist, Bank of Baroda, says the weighting of components in the CPI should reflect the consumption pattern of the people of any country. 

“This said, the weightings given in the CPI broadly reflect the composition as of 2011-12, which is what is used today. Hence the weight of 46 per cent is not amiss in this situation.”