CONSUMER PRICE INDEX

India has been measuring inflation at the consumer prices also besides at the wholesale prices. But in place of a single consumer price index (CPI), India was managing with four differing set of the CPIs due to the socio-economic differentiations found among the consumers (i.e., people’s choices of consumption and their purchasing power).Though, in 2011-12, the government announced a new set of consumer indices (i.e., CPI-R, CPI-U and CPI-C), datasets for the older CPIs (to be phased out in coming times) are still announced by the Central Statistical Office (CSO). A brief review of the older CPIs are given below:

1. CPI-IW 

The Consumer Price Index for the industrial workers (CPI-IW) has 260 items (plus the services) in its basket with 2001 as the base year (the first base year was 1958–59). The data is collected at 76 centres with one month’s frequency and the index has a time lag of one month. Basically, this index specifies the government employees (other than banks’ and embassies’ personnel). The wages/salaries of the central government employees are revised on the basis of the changes occurring in this index, the dearness allowance (DA) is announced twice a year. When the Pay Commission recommends pay revisions, the base is the CPI (IW).

2. CPI-UNME 

The Consumer Price Index for the Urban Non-Manual Employees (CPI-UNME) has 1984–85 (first base year was 1958–59) as the base year and 146–365 commodities in the basket for which data is collected at 59 centres in the country—data collection frequency is monthly with two weeks time lag. This price index has limited use and it is basically used for determining dearness allowances (DAs) of employees of some foreign companies operating in India (i.e., airlines,communications, banking, insurance, embassies and other financial services). It is also used under the Income Tax Act to determine capital gains and by the CSO (Central Statistical Organisation) for deflating selected services sector’s contribution to the GDP at factor cost and current prices to calculate the corresponding figure at constant prices. Since the publication of the CPI (U) started the index was discontinued with from January 2011.

3. CPI-AL 

The Consumer Price Index for Agricultural Labourers (CPI-AL) has 1986–87 as its base year with 260 commodities in its basket. The data is collected in 600 villages with a monthly frequency and has three weeks time lag.
This index is used for revising minimum wages for agricultural labourers in different states. As the consumption pattern of agricultural labourers has changed since 1986–87 (its base year), the Labour Bureau proposes to revise the existing base year of this index. For the revision, the consumer expenditure data collected by the NSSO during its 61 NSS Round (2004–05) is proposed to be used. The governments at the Centre and states remain vigilant regarding the changes in this index as it shows the price impact on the most vulnerable segment of the society, this segment spends almost 75 per cent of its total income on the purchase of food articles. Governments’ failure to stabilise the index in the long range can make them politically volatile and be translated into political debacles. That is why the FCI is always kept ready to supply cheaper foodgrains in the situations of any price rise.

4. CPI-RL 

There is yet another Consumer Price Index for the Rural Labourers (CPI-RL) with 1983 as the base year, data is collected at 600 villages on monthly frequency with three weeks time lag, its basket contains 260 commodities. The agricultural and rural labourers in India create an overlap, i.e., the same labourers work as the rural labourers once the farm sector has either low or no employment scope. Probably, due to this reason this index was dropped by the government in 2001–02. But after the government change at the Centre the index was revived again

Revision in the CPI

In 2011-12, Government announced a new set of the consumer price indices—CPI-R for the rural market, CPI-U for the urban market, and by combining them a ‘national’ CPI. The national consumer price index is called CPI-C (where ‘C’ stands for Combined). In order to make them more robust, the CPIs were further revised in 2015 by incorporating the following changes:

(i) The base year has been changed from 2010=100 to 2012=100.
(ii) The basket of items and their weighing diagrams have been prepared using the Modified Mixed Reference Period (MMRP) data of Consumer Expenditure Survey (CES), 2011– 12, of the 68th Round of National Sample Survey (NSS). This has been done to make it consistent with the international practice of shorter reference periods for most of the food items and longer reference period for the items of infrequent consumption. The weighing diagrams of old series of CPI were based on the Uniform Reference Period (URP) data of CES, 2004–05, of the 61st Round of NSS. With this change in the weighing diagrams, the gap between Weight Reference Year and Price Reference Year (Base Year), which was six years in the old series, has now been reduced to six months only. Due to changes in the consumption pattern from 2004–05 to 2011–12, the weighing diagrams (share of expenditure to total expenditure) have changed. A comparison of weighing diagrams of the old
(iii) The number of Groups, which was five in the old series, has now been increased to six. ‘Pan, tobacco and intoxicants’, which was a Sub-group under the group ‘Food, beverages and tobacco’, has now been made as a separate group. Accordingly, the group ‘Food, beverages and tobacco’ has been changed to ‘Food and beverages’.
(iv) Egg, which was part of the sub-group ‘Egg, fish and meat’ in the old series, has now been made as a separate sub-group. Accordingly, the earlier sub-group has been modified as ‘Meat and fish’.
(v) The elementary/item indices are now being computed using Geometric Mean (GM) of the Price Relatives of Current Prices with respect to Base Prices of different markets in consonance with the international practice. In the old series, Arithmetic Mean (AM) was used for that purpose. The advantage of using GM is that it moderates the volatility of the indices as GM is less affected by extreme values.
(vi) Prices of PDS items under Antyodaya Anna Yojana (AAY) have also been included for compilation of indices of PDS items, in addition to Above Poverty Line (APL) and Below Poverty Line (BPL) prices being taken in the old series.
(vii) Sample size for collection of house rent data for compilation of House Rent Index, which was 6,684 rented dwellings in the old series, has now been doubled to 13,368 rented dwellings in the revised series.
(viii) Apart from All-India CPIs (Rural, Urban, Combined) for sub-group, group and general index (all-groups), which were released for the old series, all India Item CPIs (Combined) will also be available.
(ix) The Consumer Food Price Indices (Rural, Urban, Combined) will be compiled as weighted average of the indices of following sub-groups, as practiced earlier in the old series (only the weights have been revised):

Trends in Inflation

Inflation has been a highly sensitive issue in India right since Independence and it has been so during the ongoing reforms process period, too. It has an incessant tendency of resulting into ‘double digits’, taking politically explosive proportions like governments falling at the Centre and state levels due to price rise of the commodities such as edible oil, onion, potato, etc. In such situations the government in general has been taking recourse to tighter money supply to contain the state level disturbances due to price rise of the commodities such as edible oil, onion, potato, etc., although it has contained inflation, but at the cost of higher growth. Price rise got rooted in India’s political psyche in such a way that the government did check frequent famines quickly at the cost of long-term endemic hunger and sustained malnutrition

Current Trends: 

As per the Economic Survey 2019-20, the latest trends of inflation in the country are as given below:

• The headline inflation based on CPI-C has been sliding since 2014—falling from 5.9 per cent of 2014-15 to 3.4 per cent by 2018-19. The fall was led by a drastic fall in food inflation, which fell down from 6.4 per cent in 2014-15 to 0.1 per cent in 2018-19.
• Since August 2019 a slight rise was seen in the CPI-C and food inflation—by December 2019, CPI-C was 7.4 per cent and CPI-Food inflation 14.1 per cent. This rise was mainly driven by the rise in vegetable prices.
• In December 2019, WPI stood at 2.6 per cent which had been declining from April 2019 (3.2 per cent) to November 2019 (0.6 per cent). WPI-food index which kept declining throughout 2017-18 and 2018-19 saw an uptick in 2019-20.
• Since July 2018, CPI-Urban inflation, has been consistently above CPI-Rural inflation.This is in contrast to earlier experience where rural inflation has been mostly higher than urban inflation. The divergence has been mainly on account of the differential rates of food inflation between rural and urban areas witnessed during this period. In 2019-20, there has been sudden change in the trend. Since July 2019, urban areas registered much higher food inflation when compared to rural areas. Divergence in rural-urban food inflation in 2019-20 was mainly led by cereals, eggs, fruits, vegetables etc.
• The slide in rural inflation could be because of fall in the growth of real rural wages.
• The divergence in rural-urban inflation is not just observed in the food component but in other components also—

(i) In clothing and footwear, inflation in urban areas was 3.3 per cent in 2019-20 (April-December), approxi-mately 3 percentage points higher than that observed in rural areas.
(ii) For Paan, tobacco and intoxicants, Fuel and light and Miscellaneous groups, inflation observed in rural areas was higher than that in the urban areas. Miscellaneous basket comprises of household goods and services, health, transport and communication, recreation and amusement, education, personal care and effects.
(iii) However, due to the high overall weight attached to the food and clothing & footwear groups in the rural index, the overall inflation observed in rural areas at 3.4 per cent was lower than the overall inflation observed in urban areas which was at 5.0 per cent in 2019-20 (April-December).
(iv) The decline in rural inflation in items like clothing and footwear, fuel and light could be due to fall in growth of real rural wages, while rise in rural price index for items like education, health, personal care, etc. also raises the question of affordability of these items to the rural segment.
An analysis of inflationary trends in India does not pin-point any one reason behind it rather economists have cited all possible reasons (the so called good and bad) for it—we may have a brief idea about them:

 PRODUCER PRICE INDEX

Producer price index (PPI) is a better measure of inflation in comparison to both WPI and CPI. The ongoing process of economic reforms has increasingly connected India to the world which makes it necessary to evolve right comparative indicators. Inflation being among the most vital economic indicator in comparative economics the government proposed to switch over from the WPI to PPI in 2003-04.
Special features: The PPI measures price changes from the perspective of the producer, while CPI from the perspective of consumer and WPI from the perspective of wholesale ‘mandis’. In practice, the wholesellers charge higher prices to retailers, in turn retailers charge higher prices to consumers and the price increase is translated into the higher consumer prices—thus the PPI is useful in having an idea of the consumer prices in the future. In PPI, only basic prices are used while taxes, trade margins and transport costs are excluded. This index is considered a better measure of inflation as price changes at primary and intermediate stages can be tracked before it gets built into the finished goods stage. Due to its better use many economies have switched over to the PPI—the oldest such series is maintained by the Bureau of Labor Statistics (BLS) for the US economy—the index is capable of measuring prices at the wholesaler or the producer stage—widely used by private business houses in their price targeting. By mid-2019, Government did set up a Working Group headed by Ramesh Chand, member Niti Aayog, with a wide term of reference which includes the following issues related to the existing WPI—
(i) Suggesting a new base year of WPI [The last revision in its base year to 2011-12 was done in May 2017];
(ii) Reviewing the commodity basket of the WPI and decide on the computational methodology to be adopted for monthly WPI/PPI [Since 2011-12 significant structural changes have taken place in the economy and it has become necessary to examine the coverage of commodities, weighting diagram and related issues pertaining to the existing WPI];
(iii) Reviewing the existing system of price collection in particular for manufacturing sector and suggest changes for improvement [Data collection method for manufacturing sector has been weak and unable to capture the sector in the real sense]; and (iv) Devising a new PPI and recommend a roadmap to switch over from WPI to PPI [It has been a long-drawn plan of the Governments to switch over from WPI to PPI—the first Working Group on it was set up in 2004-05 under the chairmanship of Prof. Abhijit Sen, member of the erstwhile Planning Commission, which got inputs from the IMF also. In 2014, another Working Group was set up under Prof. B. N. Goldar to devise a PPI after the Reserve Bank of India began considering CPI-C inflation as a better gauge over the WPI inflation.

HOUSING PRICE INDEX

India’s official Housing Price Index (HPI) was launched in July 2007 in Mumbai. Basically developed by the Indian home loans regulator, the National Housing Bank (NHB) the index is named NHB Residex.Currently, it is published for 50 cities (being expanded to cover 100 cities) on quarterly basis with 2012–13 as base year. Among 50 cities covered are 18 State/UT capitals and 37 Smart Cities. NHB is not computing the composite all India housing price index as of now.

SERVICE PRICE INDEX

The contribution of the tertiary sector in India’s GDP has been strengthening for the past 10 years and today it stands above 60 per cent. The need for a service price index (SPI) in India is warranted by the growing dominance of the sector in the economy. There is no index, so far, to measure the price changes in the services sector. The present inflation (at the WPI) only shows the price movements of the commodity-producing sector, i.e., it includes only the primary and the secondary sectors—the tertiary sector is not represented by it.