India's new CPI inflation series to be released faster, says Pronab Sen

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India could get a new Consumer Price Index (CPI) series as early as 2024, thanks to the ongoing Consumer Expenditure Survey being conducted using tablets, according to Pronab Sen, head of the Standing Committee on Economic Statistics.

"It should be faster this time simply because the data has been collected with tablets. It used to take 7-8 months for data entry. Hopefully, that time will be dramatically shortened," Sen told Moneycontrol.

Despite the use of tablets, Sen said the new series will not be released "before the end of next year".

The Standing Committee on Economic Statistics was formed in late 2019 to improve the quality of India's official data amidst criticism of political interference.

After years of delay due to the pandemic, the government's Consumer Expenditure Survey was finally launched on July 1 and will conclude on June 30, 2023.

The survey is the basis on which perhaps the most crucial of economic indicators, CPI inflation, is updated, with the Reserve Bank of India's (RBI) inflation target being spelt out in terms of this inflation measure. The survey will be used to revise not just the base year of the CPI series but also the basket of goods and services – and their weightages – for which prices are to be measured.

The current CPI inflation series is based on the 2011-12 (July-June) Consumer Expenditure Survey. The series was released in February 2015, more than two-and-a-half years after data collection was completed.

While the government had conducted a Consumer Expenditure Survey in 2017-18 (July-June), it refused to release it, citing data quality issues. It said this (external link) after Business Standard reported in November 2019 the draft report of the survey found consumer spending had fallen.

Within months of the survey being junked, there was the Coronavirus breakout, making it impossible to conduct another survey until now.

New items, weightages

The CPI series needs to be updated so that retail inflation can be measured accurately. This would lead to better monetary policy decisions as several items in the current CPI basket – such as DVD players and tape recorders – are as good as obsolete now. Yet, the change in their prices are part of headline CPI inflation and considered by the RBI's Monetary Policy Committee in making its interest rate decision.

Perhaps as important as the composition of the CPI basket is the weightage given to items.

Currently, the 'food and beverages' group has a weightage of 45.86 percent. As such, changes in food prices - which can be large, temporary, and often due to supply shocks - have a telling effect on headline inflation.

According to the RBI, the huge share of food in the CPI basket and the high volatility of food inflation are two reasons for the 2-6 percent tolerance band of India's flexible inflation targeting framework being wider than that of other countries.

Given the high weightage of food, the current CPI series has been criticised in recent years for misrepresenting inflation levels as household spending on food, as a fraction of total spending, has likely fallen since the last Consumption Expenditure Survey was conducted more than a decade ago.

For instance, the new CPI series for Industrial Workers, released in late 2020, saw a reduction in the weightage of food to 39.17 percent from 46.2 percent. Using this lower weightage, instead of 45.86 percent, headline retail inflation would have been roughly 25 basis points lower than the 6.6 percent it averaged in 2020.

However, while Sen said that the weightage of food in the new CPI series will "almost certainly" be lower, it may not necessarily lower the headline inflation rate on its own.

"We have a situation with core inflation. Food is actually less affected by global prices. It is much more affected by domestic demand conditions. If you are allowing free exports, yes, the ball game changes. But you have clamped that down," Sen said.

India's core inflation rate – or inflation minus food and fuel – has been above 6 percent for nearly all the time during the pandemic.