The unexpectedly large increase in Consumer Price Index (CPI) inflation in January was because of a tweak in the usual methodology, Moneycontrol has learnt.
Headline retail inflation rose far more than expected to a three-month high of 6.52 percent in January from 5.72 percent in December, data released by the statistics ministry showed last month, with economists pointing out that there seemed to be a discrepancy in the cereals index of the CPI behind the sharp rise.
While the ministry said the index of cereals rose 2.6 percent month-on-month in January, a manual computation of the same using the 20 individual components of the 'cereals and products' subgroup showed the increase to be far lower and resulting in a headline CPI inflation rate that was 20-35 basis points lower than 6.52 percent.
One basis point is one-hundredth of a percentage point.
When asked for a comment on the same, the statistics ministry had told Moneycontrol last month the data was fine, that there had been no overestimation of inflation, and an internationally-accepted methodology was being used since 2013.
Moneycontrol had reported on February 15 that the discrepancy was being caused by the government's provision of free foodgrain through the Public Distribution System (PDS) under the National Food Security Act.
As it turns out, the provision of these foodgrains for free caused a change in the statistics ministry's methodology. And this tweak could impact inflation numbers for all of 2023, the period for which the Centre has promised to make previously-subsidised foodgrain available for free.
Free goods issue
According to a government official who requested anonymity, the entire issue lies in how free goods are treated in the computation of inflation numbers.
"What happened in January, as is known, is that foodgrain started being provided for free through the PDS. Now, the methodology spelt out in the CPI manual explains how free goods are to be treated in the computation of inflation," the source said, referring to a manual framed by the Inter-Secretariat Working Group on Price Statistics.
The Inter-Secretariat Working Group on Price Statistics is a combined forum of the International Labour Organisation, EuroStat, the Organisation for Economic Cooperation and Development, the United Nations Economic Commission for Europe, the World Bank and the International Monetary Fund.
The group had in the early months of the coronavirus pandemic in 2020 issued 'Business Continuity Guidelines' to address the non-availability of price data for certain items given the lockdowns imposed in much of the world. These guidelines were followed by the statistics ministry in its imputation of price data for April and May 2020.
According to the aforementioned CPI manual—first published in 2004 and then updated in 2020—free social transfers in kind, such as goods and services provided free of charge to households by governments, should be excluded from the scope of the CPI.
All-India issue
With the Pradhan Mantri Garib Kalyan Anna Yojana ending in December, the Union Cabinet announced the provision of free foodgrain via the PDS for all of 2023.
Two of the items in the CPI basket that are affected by this announcement are PDS rice and PDS wheat/atta. The two items together account for 0.54 percent of the CPI basket.
"As per the methodology, any weight assigned to an item that is being provided for free becomes zero. This weight, which has been marked down to zero, is then distributed pro-rata to the other items of that group," the source added.
January was not the first time the statistics ministry has had to employ this procedure. It has done so at the state level, with Tamil Nadu and West Bengal both providing goods for free under PDS.
"When the methodology given in the CPI manual was previously used to treat the provision of free goods by these two states, the impact on the all-India inflation number was negligible. But when PDS foodgrain is free all over the country, then the impact is far larger," the source explained.
Given that the Centre will provide foodgrain for free via the PDS for all of 2023, future inflation readings—starting from that for February, scheduled to be released on March 13—could also be similarly impacted.
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