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Experts want PDS food items out of the new inflation series
Context:
The Ministry of Statistics and Programme Implementation (MoSPI) in India has initiated a discussion regarding the treatment of items distributed through the Public Distribution System (PDS) in the Consumer Price Index (CPI).
More in News:
- This discussion arises amidst a broader effort to revise the CPI base year from 2012 to 2024, aiming to better reflect current consumption patterns and economic realities.
- The revision is particularly significant given the implementation of the National Food Security Act (NFSA), which began providing free food grains to eligible households starting January 1, 2023.
About the Policy Change Proposed by MoSPI:
- MoSPI’s discussion paper seeks input on how to account for free PDS items in the CPI compilation. The primary focus is on whether these items should be included in the CPI basket, especially since households incur no direct expenditure on them.
- The paper highlights two key challenges:
- Adjusting prices of PDS items mid-series and
- Determining their inclusion at the start of the new CPI series. The weights and item basket for the new CPI will be derived from the Household Consumption Expenditure Survey (HCES) conducted in 2022-23.
Rationale Behind This:
- The rationale for revising the CPI and addressing PDS items stems from a need to accurately capture inflation and its impact on households.
- Currently, the CPI reflects prices of goods and services that households purchase, but free distributions complicate this measurement.
- Experts argue that excluding PDS items may provide a clearer picture of inflation as it pertains to monetary transactions, which are essential for effective monetary policy formulation.
Issues Arising for CPI Compilation:
The inclusion or exclusion of PDS items presents several issues:
- Price Adjustments: There is a challenge in adjusting prices from a positive value to zero when items become free, or vice versa.
- Weight Distribution: In states where free distribution is implemented broadly, weights for PDS items may need to be redistributed among other items, which could distort overall inflation readings.
- Impact on Inflation Metrics: Economists express concern that including PDS items could lead to misleadingly low inflation figures, potentially impacting economic policy decisions.
Arguments For and Against Inclusion:
- Arguments For Inclusion
- Market Impact: Some economists argue that PDS sales influence market prices; thus, they should be included for a comprehensive estimation of inflation.
- Conceptual Validity: The argument that “no price is also a price” suggests that even free goods have an economic impact that should be captured in CPI calculations.
- Arguments Against Inclusion:
- No Monetary Transaction: Many experts believe that since no money is spent on PDS items, they should not be included in the CPI series.
- Minimal Impact on Overall Inflation: Current weights of PDS items in the CPI are low (approximately 0.9%), suggesting their exclusion would not significantly alter inflation readings.
Implication of This Debate and Impact of This Key Policy Change:
The outcome of this debate will have significant implications for how inflation is measured in India.
- A decision to exclude PDS items could lead to more accurate inflation metrics that reflect actual household expenditures, thereby informing better monetary policy decisions.
- Conversely, including these items might provide a distorted view of inflation trends, particularly if they are perceived as artificially lowering inflation rates.
