Article 1: Overdue upgrade
Why in news: The new Consumer Price Index (CPI) series is in news due to its 2024 base year revision, updated consumption weights, reduced food share, expanded basket including online marketplaces, and its implications for inflation measurement, fiscal planning, and RBI monetary policy decisions.
Key Details
- Base year revised to 2024, using consumption data from the Household Consumption Expenditure Survey 2023–24, replacing the outdated 2012 base.
- Reflects changed consumption patterns, including free foodgrain distribution and the rise of OTT platforms and online marketplaces.
- Food & beverages weight reduced from 45.86% to 36.75%, making headline inflation less volatile and more realistic.
- Expanded basket and wider coverage, including more goods, services, physical markets, and 12 online marketplaces.
- Leads to more accurate inflation measurement, improving fiscal planning (DA/DR) and enabling better monetary policy decisions by the RBI.
Introduction of the New CPI Series
- The new Consumer Price Index (CPI) series was released recently.
- It addresses several limitations of the previous CPI series.
- The new series has 2024 as the base year.
- It is based on the Household Consumption Expenditure Survey (HCES) 2023–24.
- The earlier series had:
- 2012 as the base year
- Consumption patterns from 2011–12
Why the Revision Was Necessary
- Over the past decade, India’s economy and consumption patterns have changed significantly.
- Household spending composition has evolved due to:
- Expansion of government welfare schemes (e.g., free foodgrain to about 80 crore beneficiaries).
- Rise of new services like:
- OTT streaming platforms
- Online marketplaces
- These structural shifts made the older CPI series less representative.
Key Changes in the New CPI
1. Reduced Weight of Food & Beverages
- Weight reduced from 45.86% to 36.75%.
- Reflects declining share of food in household expenditure.
- Reduces the disproportionate impact of food inflation on overall CPI.
2. Expanded Coverage
- Includes a larger number of goods and services.
- Improves:
- Granularity
- Representativeness
- Recognises the growing importance of India’s service economy.
3. Inclusion of Online Marketplaces
- Data collection expanded geographically.
- For the first time, 12 online marketplaces are included in price tracking.
Implications for Macroeconomic Stability
1. More Stable Inflation Measurement
- Food inflation in India is highly volatile due to:
- Weather conditions
- Supply bottlenecks
- Lower food weight may reduce excessive volatility in headline inflation.
2. Improved Fiscal Planning
- Many government expenditures are linked to CPI, such as:
- Dearness Allowance (DA)
- Dearness Relief (DR)
- A more accurate CPI improves budget predictability.
3. Better Monetary Policy Decisions
- The Reserve Bank of India’s Monetary Policy Committee (MPC) relies on CPI for interest rate decisions.
- Updated CPI provides a more realistic inflation picture.
4. Areas for Further Improvement
- Currently, MoSPI provides only a linking factor to adjust old data.
- It should instead publish:
- Complete back series data under the new methodology.
- CPI revisions should occur every five years.
- Authorities should avoid long delays like the previous 11-year gap.
Conclusion
The revised Consumer Price Index (CPI) with a 2024 base year marks a crucial step toward more accurate inflation measurement. By reflecting updated consumption patterns, reducing excessive food weightage, and incorporating the growing service economy, it strengthens monetary policy decisions and fiscal planning. Regular revisions and transparency will ensure sustained macroeconomic stability and policy credibility.
Descriptive question:
Q. Discuss the significance of the revised Consumer Price Index (2024 base year) for inflation measurement and macroeconomic stability in India. (10 marks, 150 words