India’s statistical system is grappling with a unique issue – how to include food items under the Public Distribution System (PDS) and free social transfers in the proposed new Consumer Price Index (CPI) that forms the basis for calculating the retail inflation rate in the country. . The controversy is the big question of how to change the price of PDS commodities from positive value to zero or whether to increase the price of PDS commodities from zero to some positive value in the ongoing series, or whether to include free PDS commodities. CPI basket?
For this, the Ministry of Statistics and Program Implementation has prepared a discussion paper. MoSPI is in the process of revising the basis of CPI by updating CPI weights and baskets and introducing possible improvements in methodology for CPI compilation, the ministry said. “To make the index robust, flexible and effective, MoSPI proposes to seek the views and suggestions of users, experts, academics, government institutions, state governments, financial institutions and the public on the treatment of free PDS items at consumer prices. Compilation of the index,” it said.
There are two challenges to free distribution of PDS commodities in terms of CPI collection: (1) Mid-series adjustment: How to deal with price increases or decreases in PDS commodities from positive to zero. of PDS items from zero to some positive amount in the running series? (2) Inclusion in the CPI basket at the beginning of the series: Should free PDS items be included in the CPI basket?
Experts and officials aware of the developments said this was a peculiar issue in the compilation of the proposed new CPI inflation series. “We must also adhere to the norms set by the United Nations which do not allow the value of such commodities to be converted to zero. Redistribution of weight has been a problem in the existing series. Some suggested that we should have a minimum value of 1 instead of zero for such items, while some experts suggested removing these items from the series altogether. It will be a difficult statistical exercise as it is going to be discussed in detail,” an official told The Indian Express.
In the existing series, the weight of these commodities is distributed proportionally to other commodities (staple foodgrains and produce) within the State/Union Territory where free distribution scheme is implemented for all sections of the society in States/UTs. is Above Poverty Line (APL), Below Poverty Line (BPL) and Antyodaya Anna Yojana (AAY). However, concerns have been raised about the approach used to include free food distribution in the CPI compilation as this method does not accurately capture the impact of free food distribution on inflation.
The discussion paper details three methods for dealing with items when the value of a Social Security transfer falls from a positive amount to zero. Method one suggests using a zero value and adjusting the weights during the other update. This method is proposed for the new series of CPI. The second method suggests redistribution of weight to other items within a class/section. This method was adopted in the existing series. A third method suggests redistributing weight widely across all items in the basket.
Another issue is the free distribution of some items in the PDS for the derivation of weights and their inclusion in the CPI basket of the new series.
As out-of-pocket expenses in the existing series will be zero, if the cost share of an item is not available due to free distribution, it will not have any positive weightage and the base price and current price of such items will also be zero, the ministry said. Hence, such items are barred from the commodity basket, the ministry said, adding that this treatment of free social transfers is in line with international best practices.
In the discussion paper, the ministry cited the statistical manual of the International Monetary Fund (IMF) and said that such free items should be banned from the index at the beginning of the new series. “It may be decided that the CPI should be limited to final consumption expenditure by households, with free social transfers excluded from the scope of the index. If they are to be included, they may be ignored in practice when they are provided for free, on the grounds that households They spend zero on … If the main reason for compiling the CPI is to measure inflation or input into monetary policy decisions, the scope of the index should be limited to monetary transactions, especially non-monetary ones. Transactions generate no demand for money,” part of the IMF manual is quoted in the paper.
The Ministry is currently undertaking a base revision exercise in which it is proposed to revise the base year of CPI from 2012 to 2024. The weights and commodity baskets will be taken from the Household Consumption Expenditure Survey (HCES) 2022-23.
The Ministry has asked experts to send their comments on the treatment of PDS items and other social security transfers in the new CPI by January 15, 2025 through email psd-nso2020@mospi.gov.in.
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