BackGovernment adjusts key inflation benchmark
Focus is more on housing and health in revised inflation gaugeThe revisions reflect the changing consumption patterns of Indians over the years
PremiumIndia’s inflation gauge for industrial workers, a key index that affects the salaries of millions of government and factory workers, has become more sensitive to changes in the cost of homes, education and healthcare. Food costs still carry the highest weight, but much less than when it was last revised.
The revisions reflect the changing consumption patterns of Indians over the years. The government on Thursday changed the base year of the Consumer Price Index for Industrial workers (CPI-IW) to 2016 from 2001.
Food and beverages now account for 39% of the consumption basket from 46.2% earlier. Housing, however, accounts for 17% of the CPI-IW from 15.2% earlier.
In consumption categories, the segment comprising heads such as education, health and transport has seen a sizeable increase in weighting to 30.31% from 23.26% earlier.
A recalibration of the index was necessary as the last revision was done in 2001, and it wasn’t in sync with the changed realities, said Arup Mitra, a professor of economics at the Institute of Economic Growth in New Delhi.
The change in weights reflects rising affordability and the changing spending habits of the working class. Spending on food items as a percentage of a household’s total expenditure usually goes down as people become more prosperous, economists and marketers said.
“Aspirations of Indian consumers have certainly grown, and consumption really makes the idea of progress tangible," said Santosh Desai, managing director and chief executive officer of Futurebrands Ltd. “Besides, it’s a given when societies progress, the share of expenditure on food declines and consumers start looking at automobiles, housing and services."
Earlier, Indians were restricted to fulfilling their basic needs, he said. “Now, people have more money at a younger age. And, on the supply side, there is constant upgradation of products, whether it is a car or a phone. So aspirations on the consumer side are echoed on the product side, and they feed off each other," Desai added.
K. Ramakrishnan, managing director at the Worldpanel division of market researcher Kantar, which tracks household consumption, also pointed to similar aspirations across urban and rural markets. Even before the covid pandemic, the consumer basket was changing from a consumer goods perspective. Though food continues to be the biggest component in household consumption, many aspirational products such as face wash, hair conditioner, sanitizer and baby diapers have entered the basket, he said.
A September report by Tata Consumer Products Ltd said spending on food and beverage, apparel, gadgets, housing and transport will more than double by 2030.
During the same period, household expenditure on healthcare, education, entertainment and household care will surge as much as fourfold, it added.
Consumer behaviour, however, has changed sharply during the covid pandemic and some of the new habits are likely to stick, diverting spending into new categories. Greater focus on health, hygiene and immunity has led to a surge in spending on products such as liquid toilet soaps, chyawanprash and branded honey. “Chyawanprash saw 500% growth in summer months for a product which was used only in winters," said Ramakrishnan.
Mitra, however, said that while many Indians have benefited from the growth in the Indian economy over the years, there is a substantial number of people who have been left out.
“While the average working-class may be spending more on non-food items, the lower rung is still stuck in their struggle for survival," he added.
The CPI-IW is used as a benchmark for calculating dearness allowance for government employees, dearness relief for pensioners and wages for industrial workers in some sectors. Though it may not impact the salary of industrial workers and DA of government staff immediately, it will have a cascading impact on salary, DA and DR of workers, and pensioners.
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