How to put PDS items, free social transfers in new retail inflation index: MoSPI asks experts

The ministry said there are two challenges in the free distribution of PDS items in the context of CPI compilation: (1) Mid-series adjustments: How to address the reduction in the price of PDS items from a positive value to zero or increase in prices of PDS items from zero to some positive amount during an ongoing series? (2) Inclusion in CPI basket at the start of series: Should the free PDS items be included in the CPI basket?

Experts and officials aware of the developments said this has turned out to be a peculiar issue in the compilation of the proposed new CPI inflation series. “We have to comply with UN-prescribed norms also which doesn’t allow conversion of value of such items to zero. Redistribution of weights has turned out to be an issue in the existing series. Some suggestions were that we should take the minimal value of 1 for such items rather than zero, while some experts have suggested removal of these items altogether in the series. This is going to be discussed in detail as it will be a tough statistical exercise,” an official told The Indian Express.

In the existing series, the weights of these items are pro-rata distributed on other items of the section (major cereals and products) within the state/UT in the state/UTs where free distribution scheme is implemented for all sections of the society (above poverty line (APL), below poverty line (BPL) and  Antyodaya Anna Yojana (AAY)). However, concerns were raised regarding this approach used to include the free distribution in the CPI compilation as this method does not accurately capture the impact of free food grain distribution on inflation.

The discussion paper has detailed three methods for dealing with items in case the price of social security transfers decreases from a positive amount to zero. Method one suggests use of a zero price and adjusting the weight during the next update. This method has been proposed for the new series of CPI. The second method suggests re-distribution of the weight to the other items within the class/ section. This method was adopted in the existing series. The third method suggests re-distribution of the weight broadly over all the items of the basket.

Another issue is free distribution of certain items in PDS for derivation of weights and their inclusion in the CPI basket of the new series.

In the existing series, if an item’s expenditure share is not available due to free distribution since the out of pocket expenditure is zero, it will not have any positive weight and further the base price and current price for such items will also be zero, the ministry said. Hence, such items are excluded from the item basket, the ministry said, adding that this treatment of free social transfers is in line with the international best practices.

In the discussion paper, the ministry has cited the statistics manual of the International Monetary Fund (IMF) to state that such free items should be excluded from the index at the start of the new series. “It could be decided that the CPI should be confined to final consumption expenditure incurred by households, in which case free social transfers in kind would be excluded from the scope of the index. Even if they were to be included, they can be ignored in practice when they are considered to be provided free, on the grounds that households incur zero expenditure on them…if the main reason for compiling a CPI is the measurement of inflation or as an input into monetary policy decisions, the scope of the index should be restricted to monetary transactions only, especially since non monetary transactions do not generate any demand for money,” the part of the IMF manual cited in the paper stated.

The ministry is currently undertaking the base revision exercise that proposes to revise the base year of CPI from 2012 to 2024. Weights and item basket will be derived from Household Consumption Expenditure Survey (HCES) 2022-23.

The ministry has asked experts to send their comments about treatment of PDS items and other social security transfers in the new CPI by January 15, 2025 through email psd-nso2020@mospi.gov.in.