Confusion over cereals index of CPI caused by free foodgrain provision under PDS

The change in the index of the cereals sub-group of the CPI has left economists scratching thir heads.

The confusion that has reigned following the release of Consumer Price Index (CPI) data for January is down to the government's provision of free foodgrain through the Public Distribution System (PDS) under the National Food Security Act.

On February 13, data released by the statistics ministry showed India's headline retail inflation rose far more than expected in January.

While economists had seen inflation rising to 6.1 percent, CPI inflation rose to a three-month high 6.52 percent, driven by higher food prices.

Within food, the 2.6 percent month-on-month increase in the index of the 'cereals and products' subgroup had left economists scratching their heads. This is because if the indices of the individual 20 components of the 'cereals and products' subgroup - which includes items such as maida and grinding charges, among others - were used to calculate the headline index for the subgroup, the month-on-month increase would have been far lower, and perhaps even contracted, according to some economists.

Broadly, economists estimate January CPI inflation to be lower by 20-35 basis points if the index for the 'cereals and products' subgroup is calculated using its individual components.

One basis point is one-hundredth of a percentage point.

The statistics ministry has held its ground, with multiple media reports saying the ministry is confident of its numbers.

Source: Madhavi Arora, Emkay Global Financial Services

However, the fact remains that there is a divergence between the official index for 'cereals and products' and the one arrived at from its components, one which economists say became extremely pronounced last month.

The 'cereals and products' subgroup of the CPI is key as it accounts for nearly 10 percent of all the goods and services in the consumption basket used to measure inflation in India.

PDS decision

According to Abhiman Das, Professor of Economics at the Indian Institute of Management, Ahmedabad, the statistics ministry has not made any error.

"PDS has two components: one is priority and the other is non-priority. What has happened from January is that the priority prices have been set to zero and non-priority prices are continuing. It is not that prices are missing," Das - who spent over 20 years in the Reserve Bank of India's (RBI) statistics department and has been part of several data-related government and central bank committees - told Moneycontrol.

Late December, the Union Cabinet approved the provision of free foodgrain under the National Food Security Act for all of 2023. This came days before the expiry of the PM Garib Kalyan Anna Yojana on December 31.

"So, if prices suddenly become zero, you would expect priority items inflation to be -100 percent. That did not show up because the National Statistical Office did not receive every update from the states. That's why there is some value, -21 percent, which is showing up there," Das added.

One of the components of the 'cereals and products' subgroup is 'rice-PDS', whose index fell by 21.6 percent month-on-month in January.

"Some states have delayed giving the exact price reporting for the priority prices. So they continued with the earlier price. And in the non-priority component, prices are there and they didn't go down much. So even though there was a decline due to priority prices being set at zero, it did not show up to the extent you would expect," Das added.

Moneycontrol has contacted the statistics ministry for a comment.

On February 14, news agency Informist Media had reported quoting an unnamed official from the National Statistical Office that when there is incomplete data, "then whatever percentage weight is not reflected in the state-level indices, that is adjusted".

"The ideal situation is when all the items are reported from all the states. Since this ideal situation seldom occurs, we have a process of adjusting the weight," Informist Media reported, quoting the official.

According to Das, the statistics ministry feels the "public discourse has gone completely wrong" on the issue and that the 2.6 percent month-on-month increase in the index for 'cereals and products' is right.