Home / Economy / How inflation measurement is still stuck in VCR and cassette era

NEW DELHI : The last time a CD or cassette or a Nokia phone made it to a shopping cart may have been a decade back, but people who stumble onto the consumption basket used to gauge inflation in India may be forgiven for thinking that they are everyday purchases.

Prices of cassettes and CDs are part of 299 items that the government monitors closely to measure the average change in prices consumers pay for goods and services. Such outdated items in the gauge that measures India’s Consumer Price Index (CPI) puts a question mark over the reliability of the monthly data that the central bank uses as a key input to decide monetary policy.

“At least 10-12% items in the CPI basket are defunct," a statistics ministry official involved in the compilation of inflation data said on condition of anonymity. “There can be no justification for using this basket for computing inflation."

The official said the government is still collecting prices of Nokia mobile phones from the market as a proxy for prices of a number of smartphones available in the market. Nokia was the mobile phone market leader a decade ago when the CPI basket was last revised. However, Nokia now has less than a 2% market share in India.

Ideally, the basket of items used for compiling inflation should reflect a typical shopping list of a person living in the country and needs to be updated regularly to reflect changes in the consumption pattern. India’s inflation basket, currently in use, is a decade old, with 2012 as the base year. Contrast this with Spain, which included face masks in its inflation basket last month to gauge the impact of the pandemic more appropriately. The UK last year included hand sanitizers and home exercise kits, though it rejected face masks, anticipating a decline in sales once the pandemic subsided.

India’s inflation basket was initially planned to be updated based on the Consumer Expenditure Survey 2017-18. However, the government junked the survey in 2019, citing “data quality issues", while policy-watchers called it a move to hide adverse results. The controversial decision left the much-needed revision in the inflation basket hanging in the balance.

Many economists have called out the obsolete consumption basket and called for a revision to make inflation numbers more credible, more in the context of a falling share of food items and rising share of services. “If we remove food, fuel and transport, and compare with private consumption data in nominal terms, the share of other items is significantly higher than what the CPI data is suggesting," said Sakshi Gupta, senior economist at HDFC Bank.

Rahul Bajoria, chief economist-India, Barclays, hopes the government expedites the consumer expenditure survey to pave the way for a new CPI basket.

“It is true that the CPI basket is now a bit old, and ideally, we should have had a new CPI in 2019-20 itself," Bajoria said.

However, the hands of the statistics ministry are tied. The ministry had plans to conduct back-to-back Consumer Expenditure Surveys in 2020 and 2021, but the plan was shelved due to covid-19 restrictions.

“For now, the ministry is hoping to conduct the survey from July 2022 to June 2023," the official said. “If the survey goes ahead as per the plan, even then, the CPI basket is unlikely to be revised before 2024 or 2025."

If that timeline holds, brace for retail inflation figures based on Indians’ consumption patterns that will by then be almost 15 years old.

“Until the new CPI basket is in place, looking at the core inflation, which has been sticky over the past one year, is important," Gupta said.

Inflation data for February is due today.

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