MoSPI seeks feedback on inclusion of PDS food items in retail inflation

The Ministry of Statistics and Program Implementation (MoSPI) has come out with a second discussion paper seeking feedback on the inclusion of food items distributed free of cost through the public distribution system (PDS) in the proposed new consumer price index (CPI) series. 

 

The series is slated to be launched in February next year. 

 

The paper proposes to create a single commodity index for different food items by combining PDS prices (zero or subsidised in some states, weighted by consumption categories) with open market prices. Creating a separate index for PDS food items would not be of much importance as their prices are regulated by the government and may not reflect actual price changes, the paper suggested. 

 

 

This methodology had been discussed with an International Monetary Fund (IMF) expert, under the technical assistance mission in August.

 

“The IMF expert was of the view that the proposed method does not mute price changes for rice, wheat and other items distributed through PDS. It would fully reflect price changes should nominal prices be introduced for the PDS products. The methodology does not overstate or distort price changes,” the paper read. 

 

Accordingly, the ministry has sought comments on the proposed methodology for handling PDS items in CPI compilation. In December last year, it had come out with a discussion paper soliciting views on whether free social transfers and grains supplied under PDS be factored into India's retail inflation calculation.  

 

In the existing CPI series, items that are distributed free of cost do not carry any expenditure share, as households incur zero out-of-pocket spending on them. Such items receive no positive weight, and both their base and current prices are recorded as zero. As a result, they are excluded from the CPI basket. This treatment of free social transfers is consistent with established international practice.

 

However, this is based on practices prevalent in western countries, where the scale of such social transfers may be miniscule, the paper noted. 

 

“In India, not only is the scale of social transfer huge, it impacts the market price of such items also. The issue has become more relevant following the recent policy changes under the National Food Security Act (NFSA), which aims to provide free food grains to eligible households. As per the scheme, about 75 per cent of rural population and 50 per cent of the urban population are provided free food grains across India,” it said. 

 

Discussions were held in the meetings with the IMF, World Bank, United Nations Economic Commission for Europe’s Group of Experts on CPI and MoSPI’s Expert Group on the Base revision of CPI.  

 

“Experts were of the view that considering the scale and impact on household consumption patterns and taking into account the purpose of CPI (not restricting to monetary policy only in India), free PDS items should be appropriately accounted for within the Indian CPI framework,” it noted.