India's inflation measure needs to be updated, one of the three external members of the Monetary Policy Committee (MPC) has said.
Writing in a paper, Ashima Goyal said the Consumer Price Index (CPI) needed wholesale changes, ranging from the weight of items contained in the basket to the number and quality of goods.
"In 10 years, the weight and variety of goods in the consumption basket is likely to have changed. The share of food inflation in the consumption basket falls with development," Goyal wrote.
The paper, 'Flexible Inflation Targeting: Concepts and application in India', was published in the Indian Public Policy Review journal on September 23.
The current CPI basket is made up of 299 items. Given the fact that the CPI series was last updated more than seven years ago in February 2015, it includes goods such as DVD players, radios, and audio cassettes, among others, that are now as good as obsolete.
However, updating the CPI series is not an easy task, as it is contingent on the government conducting its Consumer Expenditure Survey.
The current CPI inflation series is based on the 2011-12 (July-June) survey.
While a Consumer Expenditure Survey was conducted in 2017-18 (July-June), the government refused to release it citing data quality issues. It said this (external link) after Business Standard reported in November 2019 that the draft report of the survey found consumer spending had fallen.
Within months of the 2017-18 survey being junked, the coronavirus pandemic broke out, making it impossible to conduct another survey until the latest survey was launched earlier this year on July 1.
Pronab Sen, head of the Standing Committee on Economic Statistics, had told Moneycontrol in July that the new CPI series could be available in 2024 thanks to the ongoing Consumer Expenditure Survey being conducted using tablets.
Core over headline?
Goyal also commented that core inflation – a measure of inflation which excludes the volatile food and fuel components – could be a better target for the MPC than the headline retail inflation rate.
"In the early years of inflation targeting, many countries had core inflation as a target, as it was regarded as better to focus on what a central bank can affect. Now, headline inflation is the target in most countries, as confidence in the ability of the inflation target to impact inflation expectations has increased," Goyal wrote.
"It is necessary, however, to suit country context and experience. The target can change as required."
According to Goyal, core inflation dominates household expectations in the long run, with correct inflation forecasts – which can be more accurate for core inflation – further helping to anchor expectations.
"Repo affects demand for industrial goods and services, which dominate core inflation. This traditional transmission channel may work better under a core inflation target," she added.
However, Goyal added the caveat that "equity and consumer welfare considerations" were in favour of the inflation target being spelt out in terms of the headline number. This, in the Indian context, meant there was more responsibility on the government to resolve supply-side issues given the large number of supply shocks and bottlenecks.
"Moreover, the food items dominating headline CPI are more amenable to government action, such as the choice of agricultural support prices. Therefore monetary-fiscal coordination is required."