MoSPI proposes methodology to reflect free ration in Consumer Price Index compilation

New Delhi: The Ministry of Statistics & Programme Implementation (MoSPI) has proposed a methodology to appropriately reflect free food grains distributed through PDS in the CPI, which is used in monetary policy, computing cost of living, and formulation of social welfare schemes.

The Consumer Price Index (CPI) measures changes in the general level of retail prices of a representative basket of goods and services consumed by households. The basket includes items across major categories such as food and beverages, clothing, housing, education, healthcare, and transportation.

The ministry is conducting the base revision of the CPI. The process includes enhancing coverage of price collection, refining existing methodologies, exploring new data sources and effective use of modern technology in the price collection and index compilation.

In view of the launch of the free food grain distribution scheme by the government from January 2023, covering 75 per cent rural and 50 per cent urban population, the issue of appropriate and realistic reflection of the same in CPI and inflation measurement has become relevant and desirable, the MoSPI said.

The issue has been deliberated in detail with the National and International experts, RBI, IMF, other UN institutions and government organisations.

A brainstorming session on the topic was also held in November 2024, followed by the first discussion note published by MoSPI in December 2024.

“The issue of how to appropriately reflect free distribution of PDS items in CPI has become more relevant following the recent policy changes under the National Food Security Act (NFSA),” said MoSPI’s ‘Discussion paper 2.0 on treatment of free PDS items in the CPI compilation framework’.

In India, the CPI serves a dual purpose — it is not only the principal indicator for monetary policy formulation by the RBI, but also widely used as a proxy for tracking changes in the cost of living and for indexation of wages, pensions, and formulation of social welfare schemes.

At present, the CPI is compiled every month on the basis of price data collection from 1,181 rural markets and 1,114 urban markets across the country. To ensure the robustness and effectiveness of the CPI series throughout its life, the paper said MoSPI has developed a methodology. The proposed methodology in the discussion paper 2.0 is designed by MoSPI after incorporating suggestions and feedback received during above mentioned interactions. It will be valid for all food items distributed through PDS, it said, while inviting stakeholders’ comments by October 22.

The ministry said the proposed methodology was also discussed with the IMF expert in the Technical Assistance Mission held in August this year.

“The methodology does not overstate or distort price changes,” it added. The paper said that given the dual role and considering the extensive coverage and policy significance of India’s free food distribution programme under PDS, discussions were held in the meetings with the IMF, World Bank and UNECE’s Group of Experts on CPI and MoSPI’s Expert Group on the base revision of CPI.

Experts were of the view that, considering the scale and impact on household consumption patterns and taking into account the purpose of CPI (not restricting to monetary policy only), free PDS items should be appropriately accounted for within the Indian CPI framework. Since any change in the CPI methodology in the middle of the series is considered a break in the series, it is essential to think through all the possible cases which may arise in future, it added.