The government has updated the base year for a key inflation gauge, the Consumer Price Index, a move that was both necessary and sensible. | File Image
The government has updated the base year for a key inflation gauge, the Consumer Price Index, a move that was both necessary and sensible. At the same time, it raises legitimate concerns about representation and the political economy of a lower official inflation rate. The revised index is built on a new base year of 2024, replacing the 2012 benchmark that had aged. The new CPI expands coverage from 299 to 358 items, increases the representation of services, and aligns India’s classification with COICOP 2018 (Classification of Individual Consumption According to Purpose), the UN-standardised, updated framework for classifying household expenditure into 12 main divisions by function, replacing the 1999 version.
Data collection has been expanded to 1,465 rural and 1,395 urban markets, with prices now also captured from 12 online marketplaces. Previously obsolete items such as VCRs and tape recorders have been replaced by streaming services, cleaner fuels, and digital storage devices. This also recognises that the service sector has grown faster than agriculture. In recent years, it has often grown at a pace comparable to, or even faster than, the industry. Over the last 10 years, real services-sector growth has averaged 6-8 per cent annually, despite the pandemic disruption in 2020.
For example, an urban middle-class household that now spends more on subscriptions, school services, and electricity than on cereals and pulses is closer to what the new CPI basket aims to represent than the 2012 base. While recognition of this reality needs to be acknowledged, there is another reality it ignores at its own peril: even today, lower-income and poorer households still spend heavily on food; hence, in welfare terms, a “less food sensitive” CPI risks under-signalling distress when food prices spike. There is also a clear welfare angle here. Several payments, such as dearness allowance for government employees, pensions, and cash transfers, are linked to the overall CPI. If the official inflation measure declines due to the redesigned basket, payouts will likely be revised more slowly, even as the actual cost of food rises for those at the bottom of the pyramid.
The growing reliance on online prices is another area that needs careful handling. E-commerce platforms are prone to “flash sales” and deep, temporary discounts, which can make prices look more benign than what most buyers face most of the time. Unless the treatment of such episodes is transparent and robust, online data can skew the picture rather than enrich it. While the CPI rebasing is timely, it must also be credible. Without that, the inflation figures will remain open to criticism. Hence, the durability of the reform will depend on sustained transparency, timely updates to weights, and continued efforts to ensure the index aligns with what families actually experience in the marketplace.
