NEW DELHI: The ministry of statistics & programme implementation (MoSPI) has floated a discussion paper to seek views on the treatment of “free public distribution system (PDS) items in the Consumer Price Index (CPI) compilation”, as it feels the current mechanism doesn’t properly capture the impact of free food distribution on inflation.
Most experts who FE spoke to, however, said there is no need to include freely distributed food items in the CPI series, as there is no money spent by households on these items. But some say, a new mechanism to capture the PDS items in a better way should be developed.
The paper comes in the backdrop of the CPI base revision exercise, which is being undertaken to overhaul the entire CPI basket, so that new consumption patterns of households may be captured and adequately reflected in the inflation numbers.
As per the paper, CPI base year will be changed from 2012 at present to 2024, and the index’s weights and items will be derived from Household Consumption Expenditure Survey (HCES) 2022-23.
The paper says that the challenge of addressing freely distributed PDS items in the CPI compilation came into focus with the implementation of a new integrated food security scheme under the National Food Security Act (NFSA). Starting from January 1, 2023, the Centre initiated the scheme to provide free food grains for one year to beneficiaries under the Antyodaya Anna Yojana (AAY) and Priority Households (PHH) categories.
As per the paper, two issues need to be addressed in the context of CPI: (a) how to address the reduction in the price of PDS items from a positive value to zero or increase in prices of PDS items from zero to some positive amount during an ongoing series?; and (b) should the free PDS items be included in the CPI basket, at the start of the series?
Currently, in the existing series, in the State/UTs where free distribution scheme is implemented for all sections of the society, the weights of these items are “pro-rata distributed” on the other items of the section (that’s major cereals and products) within the State/UT. But experts have raised concerns, and have said that this method is not the accurate measure of assessing inflation, says the paper.
Former chief statistician of India Pronab Sen said: “I believe the PDS items should be excluded from the CPI series, because there is no expenditure on it. If needed, change the weights of food by deducting PDS’ share, but including its price (in CPI series) is not necessary.”
Paras Jasrai, senior analyst, India Ratings and Research said that the CPI basically captures the price of goods and services that are “consumed and purchased” by households, and if an item’s expenditure share is not available due to free distribution–as no monetary transaction has been incurred by households–then they should be excluded from the basket.
The IMF’s ‘CPI Manual: Concepts and Methods 2020’ also suggests exclusion of freely distributed items from CPI basket. “If the main reason for compiling a CPI is the measurement of inflation or as an input into monetary policy decisions, the scope of the index should be restricted to monetary transactions only, especially since non monetary transactions do not generate any demand for money.”
However, some economists feel that PDS items should be captured in the CPI basket, as “no price is also a price”. At a conference, last month, many economists had suggested MoSPI to develop a proper methodology to capture the highly subsidised prices.
“Given there is a reasonably large volume of food sold via PDS, and this provision impacts market prices of these products also, there is a case to include these sales in the CPI computation for a comprehensive estimation,” said Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership.
Former MoSPI secretary TCA Anant said that even if PDS items are included in CPI basket, they won’t cause any major change in the headline inflation reading, as those items’ prices won’t be volatile. “The volatility in the food basket comes from vegetables, pulses, and other items,” he said.
“Moreover, the free distribution percentage as a percentage of total consumption (of all items) is small. Only in the case of cereals, PDS has a significant share. But since cereals’ share (in overall consumption) has now reduced, its impact on new CPI readings will not be much,” Anant added.
In the extant CPI series PDS items are captured. Precisely, there are four PDS items–rice, wheat, sugar, and kerosene–which are captured in the CPI, through a separate entry. Collectively, the weights of these four items add up to merely 0.9% in the overall CPI basket, which consists of 299 items. Therefore, they are generally unable to make any substantial impact on the overall print.
Currently, ‘cereals and products’ sub-group holds a 9.7% weight in the CPI basket. But according to the revamped Household Consumption Expenditure Survey (HCES) 2022-23, the new CPI index may only accord 4-5% to this sub-group, which will consequently reduce the weight of PDS items as well.
Source: The Financial Express
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