India may finally measure housing inflation accurately

Of 13,368 dwellings across 310 towns surveyed by the MoSPI to calculate housing inflation, nearly 2,000 are houses provided by central and state governments and PSUs.  (Mint)
Of 13,368 dwellings across 310 towns surveyed by the MoSPI to calculate housing inflation, nearly 2,000 are houses provided by central and state governments and PSUs. (Mint)


  • Housing accounts for 10% of the Consumer Price Index. And the method of using the HRA foregone as a proxy for rent in government-provided accommodation to calculate housing inflation is flawed.

NEW DELHI : Official statistics can sometimes seem at odds with ground realities. This is a debate usually confined to growth numbers, with the legitimacy of high growth often questioned on the basis of anecdotal evidence or an underlying data point.

However, when it comes to inflation, it is no secret that the Consumer Price Index (CPI) needs a complete overhaul. And while the high weight of food items in the CPI basket hogs the headlines, the issue with housing is entirely different and rather mind-boggling.

Consider the past 15 months or so, when CPI housing inflation gradually eased from almost 5% in March 2023 to just 2.56% in May 2024. Anyone who has tried to rent a home over this period would disagree, with property website Magicbricks’ Rental Index saying rents rose 16% year-on-year in the first three months of 2024 across 13 cities in the country.

While some alterations—such as in the weight of food items in the CPI basket—will improve the accuracy with which inflation is measured, given the changes in consumption patterns over the past decade, the computation of housing inflation needs a methodological revamp.

Also Read: What's driving up housing prices in India?

The government housing spanner

Of 13,368 dwellings across 310 towns surveyed by the ministry of statistics and programme implementation (MoSPI) to calculate housing inflation, nearly 2,000 are houses provided by central and state governments and public sector undertakings (PSUs). This results in government quarters constituting 1.3% of the entire CPI, according to a Reserve Bank of India (RBI) staff paper.

For such accommodation, the house rent allowance (HRA) foregone along with a small licence fee paid by those living in them is taken as a proxy for rent and used to calculate inflation. And it is this method that has caused havoc with even the headline inflation rate for one simple reason: Inflation for this category does not depend on demand-supply forces but the consumer.

If a senior employee moves into a government house that is a part of the MoSPI sample, the rent is higher on account of the higher HRA, according to the RBI paper. The opposite holds true too—a change to a junior employee leads to lower HRA and consequently lower rent.

Also Read: Booming real estate’s in for a breather

The HRA also changes when the tenant gets an increment or when salaries are revised, as was most notably the case when the 7th Central Pay Commission recommended increasing the allowance of central government employees by 105.6% with effect from July 2017. This resulted in CPI housing inflation accelerating from 4.7% in June of that year to 8.45% by June 2018, propelling headline retail inflation from an all-time low of 1.46% in June 2017 to 4.92% in June 2018.


Of course, the impact of higher HRA on inflation was purely statistical. However, with headline inflation rising sharply, the RBI’s Monetary Policy Committee had to look through the impact of the HRA hikes.

Measuring housing inflation correctly

Housing inflation has been a problem for the RBI for the better part of a decade. And a resolution may be found with the new CPI inflation series that may be introduced in early 2026.

But how exactly can this issue be tackled? By simply ignoring government-provided houses from the sample surveyed by the MoSPI so that the use of the HRA does not create distortions. In addition to a more accurate inflation reading, complete exclusion of government-provided homes from the CPI is not unreasonable, given that the number of such quarters will be a fraction of the total number of houses in the country.

Also Read: In Indian real estate, senior living is still in the junior league

As it is, the Consumption Expenditure Survey (CES) collects data on private sector housing and rent paid. As per the 2022-23 survey, the share of rent in Monthly Per Capita Expenditure (MPCE) was 6.56% for urban India and 0.78% for rural India, up from 6.24% and 0.45%, respectively, in the 2011-12 survey.

There is no rural component in the CPI due to the “negligible number of rented dwellings in the rural areas; and the CES also does not provide estimate of imputed rent for owner-occupied houses for this sector", as per MoSPI’s handbook on the current CPI series.

The increase in the share of rent in rural MPCE in 2022-23 does not necessarily mean the new CPI series will include a rural housing category, although the latest survey did ask for prevailing rates of rent in each locality, if any.

No small issue

While housing accounts for 10.07% of the CPI, is fretting over something that makes up just 1.3% of the entire basket making a mountain out of a molehill? Absolutely not. As the episode with vegetables such as onions (0.64% weight in CPI) and tomatoes (0.57% weight) showed in 2023 and previous years, even items with sub-1% weight can have huge consequences for overall inflation.

With the RBI’s inflation target of 4% within a band of +/- 2% being spelt out in terms of the CPI, it is essential that price changes are measured as accurately as possible. The exclusion of subsidised government housing would aid in this and eliminate any communication issues for the RBI when the recommendations of future pay commissions are implemented.

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