MC Exclusive: Statistics ministry mulling back-up plan to update CPI if consumer survey junked again

India’s CPI inflation series is widely considered to be outdated as it is based on the Consumer Expenditure Survey that was conducted in 2011-12.

India's statistics ministry is mulling alternative ways to revise the Consumer Price Index (CPI) inflation series if the results of the ongoing Consumer Expenditure Survey (CES) are not made available again.

In a first-of-its-kind chintan shivir—or brainstorming session—held on July 27-28 in a Greater Noida hotel, more than 180 officers from the Indian Statistical Service gathered to "deliberate upon pressing issues faced by the official statistical system in the country and suggest a way forward".

A total of nine issues were on the agenda, ranging from gaps in the statistics ministry's surveys to challenges in estimating GDP, CPI inflation, and industrial production, among others.

One of the key issues discussed was the revision of the CPI base year and ways to overcome the non-availability of CES data. Moneycontrol has learnt that two alternative methods were floated to revise the CPI data series in case the results of the ongoing consumer surveys are not made available—something that happened a few years ago.

The government infamously junked the CES for 2017-18 citing issues with the quality of data after the financial daily Business Standard reported in November 2019 that the draft report of the survey found consumer spending had fallen. The junking of the survey and not making its results public made it impossible to update India's CPI inflation data, which remains rooted in the 2011-12 survey.

Policymakers have bemoaned the lack of updates to CPI data, with Ashima Goyal—one of the three external members on the Reserve Bank of India's Monetary Policy Committee—writing in a paper in September 2022 that the CPI needed wholesale changes.

The RBI's inflation target is spelt out in terms of headline CPI inflation. It is legally mandated to keep retail inflation in the range of 2-6 percent with a medium-term target of 4 percent.

Unpalatable alternatives

One option that was discussed at the chintan shivir—held amid some of the strongest criticism any arm of the central government has faced in years—was using Private Final Consumption Expenditure figures from National Accounts data to arrive at weights for items in the CPI basket. For instance, food and beverages—which account for 45.86 percent of the 2011-12 CPI basket—make up only around 33 percent of total consumption in latest National Accounts data, it was mentioned in the discussions.

The weight of food in the CPI is expected to decline over time as consumer spending on food as a proportion of total expenditure reduces as income rises. A lower weight for food items could reduce India’s headline inflation rate given the highly volatile nature of food inflation – CPI food inflation jumped to 4.49 percent in June from 2.96 percent the previous month and is expected to push headline retail inflation above 6.5 percent in July, data for which will be released on August 14.

A second backup plan that was discussed was seemingly more rudimentary and involved looking at how item weights changed over the last two CPI series and extrapolating that change to estimate where they might stand now.

Both the alternative methods, particularly the second, are seen as being significantly inferior to the best-case scenario that involves using the results of the ongoing CES. It is also felt that the alternatives will be rejected by the expert group on CPI base revision.

"The ministry's job is to be prepared and have back-up plans. If the results of the Consumer Expenditure Survey are not there and CPI series is still expected to be updated, then at least there should be some alternative. Whether these methods are approved is another matter," a person aware of the discussions said.

Expanded CPI basket

Apart from providing weights to items in the CPI basket, the CES is also important when it comes to expanding the list of items the basket contains. At present, the CPI basket has a total of 299 items. However, given that the CPI has not been updated in more than a decade, it contains several items that are as good as obsolete, such as DVD players, radios and audio cassettes.

Also Read: Index issues linger but RBI may have to wait until 2026 for updated CPI inflation series

In response to a Right to Information query, the statistics ministry said the questionnaire of the ongoing CES could not be made available before the release of the survey results. However, it has been learnt the ministry is seeking responses from consumers on approximately 700 items. Not all these items will necessarily be a part of the revised CPI basket, with their inclusion depending on the weights given by the result of the CES.

As per the schedule of enquiry used to collect information in the 2017-18 CES, the ministry had sought responses from consumers on around 350 items.

A key feature of the ongoing survey is the inclusion of questions pertaining to online purchases. The 2017-18 CES only asked whether any online purchase or payment had been made by any household members during the last 30 days.

The ongoing survey goes a step further and asks whether the consumer purchases a particular item via the online mode or not. However, this is where the survey falls short as it is a simple 'yes or no' question. As such, the ministry will be unable to come up with weights for consumers' online purchases.

Survey progress

Meanwhile, the back-to-back surveys being conducted by the statistics ministry are chugging along, with the first of these for 2022-23, which started in August 2022, nearing completion.

Work has also begun on training officers to ensure markets, shops and specific products are identified accurately in rural and urban areas for the market survey that will be conducted starting January 2024.

The market survey that will be conducted in 2024 will be used to identify the base prices of the items in the CPI basket. The base prices of the current CPI inflation series were collected in 2012.

The statistics ministry has expanded the coverage of price data, with the number of markets expected to be covered in the 2024 market survey rising to around 2,900, with the split being roughly even between rural and urban.

Currently, price data is collected from a total of 2,295 markets, with 1,114 of them being in urban areas and 1,181 in rural areas.