Welfare Programmes Impact the Retail Prices Relevant to People

India must update its inflation metrics to reflect actual consumption expenditure patterns for superior policy formulation

- T.C.A. ANANT

The Union ministry of statistics and programme implementation (MoSPI) has recently put out a discussion paper on 'The treatment of PDS items and other free social transfers in consumer price index (CPI) compilation'.

First, the background: In January 2023, the government announced a programme to supply free foodgrains (wheat and rice) to around 800 million households covered under the National Food Security Act. This announcement followed a series of ad hoc extensions to the free distribution of essential goods initiated during the covid crisis.

The relevance of this scheme to the index arises from the fact that wheat and rice account for a weight of almost 7.5% of the all-India combined CPI.

The discussion paper therefore highlights two challenges. One, how to account for the reduction in price of Public Distribution System (PDS) items from a positive value to zero in the ongoing series; and two, how to treat free PDS items in the proposed new series after the ongoing base-revision exercise is done.

The paper follows a 'user consultation' by MoSPI earlier on the same topic. This exercise raised speculation about its impact on inflation measurement, as it coincided with observations made by the chief economic advisor and others (including this author) on omitting food inflation from the ambit of monetary policy discussions.

Insofar as the treatment of free foodgrains for the future series is concerned, the paper cites the International Monetary Fund manual on CPI compilation, which recommends excluding from the index items that are provided free by the government or non-profit institutions.