Why we can look forward to superior policy outcomes

The CPI’s base year, methodology and coverage have been updated to better reflect what Indian households consume. Its base year is now 2024, far more recent than the old series’ 2012.

Its basket of items whose retail prices are tracked has been churned in line with findings of the 2023-24 Household Consumption Expenditure Survey (HCES). The weights assigned to various items represent actual spending patterns across the country far better than before.

Consider. Back in 2012, India was only a $1.83 trillion economy. By 2024, it was $3.91 trillion. Yet, despite this more-than-doubling of our GDP and nearly 90% increase in per capita income—from $1,429 in 2012 to $2,695 in 2024–retail inflation numbers were based on an outdated basket. That this has been rectified is a relief.

Not only has the number of items gone up, so has the CPI’s count of data collection points. The most significant change in the new series is the weight of food items, which has fallen below 37% from nearly 46% earlier. With growing prosperity, as income levels rise, people spend a smaller part of their earnings on food, while spending more on other stuff—especially services like health, education and transport. The new series reflects this reality.

Inevitably, comparisons will be made between inflation numbers from the old and new series. The latter has put retail inflation at 2.75% in January, year-on-year, while the former recorded 1.33% for December. Given the revisions made, that gap tells us little.

One could, of course, work out historical numbers using new weights and a ‘linking factor’ given by the ministry, but that would be of academic rather than policy interest.

What matters is whether the CPI update helps formulate policy better. The answer, clearly, is ‘yes.’ Evidence-based policymaking is superior to intuition-based, which is how policy often gets made in the absence of reliable data.

As India’s Chief Economic Advisor V. Anantha Nageswaran has said, the CPI reset will help calibrate monetary and fiscal policy better since updated data reflects current consumption patterns and economic conditions.

The hope now is that with volatile food prices losing CPI basket weight, headline inflation will be more stable. Note that monetary policy is more effective in dealing with demand than supply shocks; so, to the extent that food prices are driven up by shortages, we can expect this update to serve us better.

Any policy is only as good as the underlying gauge on which it is based. Granted, we could conceivably adopt an even more sensitive tracker of inflation. More frequent purchase patterns from sources other than the HCES, for example, may let us use a ‘chain-weighted’ basket for dynamic readings. But what we have in place today offers conceptual continuity.

So long as it offers a more accurate picture of the price situation, India’s central bank will be able to target inflation better in meeting this part of its mandate. As for the statistics ministry, it must stick to its plan to revise the base year of key economic indicators every three to five years, instead of 10. In a fast-growing economy, structural changes are inevitable, and unless these are captured by economic data, policy formulation and hence outcomes suffer.