New CPI series will have less instability structurally, says Pronab Sen

Former chief statistician says the revised cpi was overdue, supports excluding free pds items and sees little immediate impact on rbi policy decisions

Former chief statistician of India Pronab Sen, in a telephonic conversation with Asit Ranjan Mishra, shares his thoughts on the new Consumer Price Index (CPI) series. Edited excerpts:

 

What are your initial thoughts on the new CPI series?

 

This is a standard exercise that was long overdue. I just hope they’ve done it correctly, because compiling the CPI is not trivial. The CPI uses the consumer expenditure survey to determine the item basket and weights of each item. The items in the basket are broad categories — you can’t measure their prices directly, because it’s not one specific product. So, you have to break them down into specific products. 

Then comes the market survey. You go to the retail level and see which products within each category are selling the most. For instance, toothpaste is a category. Saying “the price of toothpaste” doesn’t mean much; you need to know which brand and size sells the most — say, Colgate 100-gram tube. That’s the level of detail required to find a representative product. It’s tricky but essential. 

Another challenge is that some items from the old basket drop out, and you have to identify new products entering the market. This time, the basket is larger because consumption across the country has broadened. As incomes rise, people can afford more items. Normally, this exercise is done every five years, but this revision comes after 12 years, which explains the bigger changes.

 

Is excluding free public distribution system (PDS) items from CPI the right approach? Doesn’t it overstate household inflation?

 

No, it’s the right approach. Anything given for free should not be included. Free goods don’t add to income; they add to consumption. Subsidised goods, however, should be included. Including free PDS items would lead to double counting.

 

The new series gives less weight to food and beverages. What does that mean structurally for inflation?

 

Food prices have been far more unstable. Structurally, this new series will be easier to handle because the instability is lower, making projections simpler.

 

What does the new CPI series mean for the inflation trajectory and the Monetary Policy Committee of the Reserve Bank of India (RBI)?

 

The inflation rate has gone up slightly, but it hasn’t breached the RBI’s tolerance limit. So, for the RBI, I don’t think it makes a major difference. They can now make a one-year-ahead projection, and only then will they be able to take a call. It’s too early to predict what will happen.

 

RBI is reviewing its inflation-targeting framework. Should it stick to the headline CPI or focus on core CPI, as some may argue?

 

This was a big debate earlier. My earlier view was that perhaps core CPI should be preferred because food and fuel were largely influenced by supply-side factors, not demand. But now, I’m not so sure.

 

So now you think it’s better to stick to headline CPI because the non-food basket’s weight has increased?

 

Yes.

 

The CPI basket has increased from 299 to 358 items, while the Wholesale Price Index (WPI) has 697 items. Should CPI have more items?

 

No. WPI captures not just finished goods but also input prices, so it naturally has more items. CPI tracks only what households consume. Investment and capital goods, like cement, are included in WPI but not in CPI.

 

We’ve tried to create a producer price index for a long time. Why hasn’t it succeeded?

 

The producer price index is important, but producers often refuse to provide prices, citing marketing secrecy. That resistance is the main obstacle.