How India measured inflation, and what is set to change

India's main inflation measure, the Consumer Price Index (CPI), is set for another major update, even though it has been in its current form for only about 15 years.

From Fragmented Indices to a Unified CPI

India’s retail inflation gauge is in for its third major reset in its current form -- the Consumer Price Index (combined), arrived at by compiling an urban and rural CPI.

While it is now used for vital public policy decisions, including the monetary policy set by the Reserve Bank of India, the now ubiquitous metric is barely one and a half decades old.

Since the 1960s, price changes in India were officially tracked through four separate consumer price indices: CPI for Industrial Workers (CPI-IW), CPI for Agricultural Labourers (CPI-AL), CPI for Rural Labourers (CPI-RL) and CPI for Urban Non-Manual Employees (CPI-UNME).

These indices were used for wage indexation and welfare decisions. The CPI-UNME was even used to compute capital gains tax indexation. However, each of these indices spoke only for a narrow slice of India’s population.

Against the backdrop of this fragmentation, the C Rangarajan Commission also known as the National Statistical Commission in 2001, set out a reform template that reads, in hindsight, like a blueprint for the CPI system India actually went on to build in the 2010s. 

Why India Needed a Population-Wide Inflation Measure

The Commission flagged that the various CPI numbers relate to different base years and cater to specific segments of the population, and thus can only be considered partial indices.

“These indices are not oriented to reflect a true picture of the price behaviour and effect of price fluctuations of various goods and services consumed by the population in the country, over a period of time,” the Commission’s report noted.

The Rural Data Challenge Behind the CPI Shift

The panel urged a conceptual shift from segment -- specific indices to population -- wide measures, adding there is a need to compile the CPI separately for the entire rural and urban populations using data from the quinquennial Consumer Expenditure Surveys conducted by the National Sample Survey organisation.

“The current CPI series does not provide changes in the prices for the entire rural and urban population since they are designed to measure the changes in the prices of goods and services consumed by specific segments of the population,” it pointed out, before suggesting that a combined index be generated based on new rural and urban indices. 

Why the Base Year Keeps Changing

Nearly nine years later, in January 2011, the ministry of statistics and programme implementation launched a fresh monthly series of Consumer Price Indices -- CPI-Rural, CPI-Urban and a Combined CPI -- with 2010 as the base year, for all-India, and for each state and union territory.

This was the first time India had a unified, population-wide CPI framework covering rural and urban households. 

Within a few years, the base was updated again to 2012. The revised CPI series was released in January 2015, along with the back series data from January 2013 onwards. 

The Rangarajan Blueprint for Reform

P C Mohanan, member and former acting chairman of the National Statistical Commission (NSC), said the time gap between the Rangarajan report and the actual implementation in 2011 can be attributed to the fact that implementing the recommendation was not just a technical tweak, but also meant reorganising the entire price collection machinery, especially for rural areas.

“The statistics ministry had a system of collecting urban prices for the urban non-manual employees [CPI (UNME)]. So it was much easier to do the urban part, but the rural part required separate efforts to collect the data,” he told BS.

Inflation Measurement: Technical Revision or Policy Game-Changer?

Staff and resource constraints compelled the government to initially outsource the rural price collection to the postal department for a year or two.

“It took some time for the government to establish the people required for field collection. That is why after the committee recommended the changes, it took almost seven-eight years for us to implement the thing. It required changes in the existing working arrangements,” he said. 

Although the CPI for Urban Non-Manual Employees (CPI-UNME) was discontinued in January 2011, the other indices, CPI-IW and CPI-AL/RL, are still compiled on a monthly basis by the Labour Bureau.

According to Mohanan, changing the industrial workers’ index is not feasible.

Industrial workers resist any change to CPI-IW because their dearness allowance (DA) is tied to it and they fear that shifting to a new or different index could reduce the allowance.

Feature Presentation: Rajesh Alva/Rediff