New Delhi: Food items could see their dominance in the Consumer Price Index (CPI) decline by up to 6.5 percentage points in rural areas and 3.4 percentage points in urban areas, going by the Household Consumption Expenditure Survey (HCES) 2022-23, experts said.
A government panel is looking into changes to the CPI basket and base year revision of the inflation series. The CPI was last revised in 2011-12 as the HCES held in 2017-18 was junked due to inaccuracies.
The panel is likely to suggest revising it downwards in line with the reduced spending on food items as per the Household Consumption Expenditure Survey, concurred officials who did not want to be named.
Currently, the weightage of food and beverages is 45.9% in CPI. It is 36.3% in urban areas and 54.2% in rural areas. This is likely to drop significantly in line with the changes in the consumption pattern thrown up in the survey. The lower weight for food items could lower retail inflation and reduce its volatility, as food products have been leading to sharp swings in inflation data.
The 2023-24 Economic Survey had even suggested that India’s inflation-targeting framework should consider excluding food from the calculation. Food inflation surged to a 15-month high of 10.9% in October, lifting retail inflation to a 14-month high of 6.2%. The monetary policy committee’s inflation target is set at 4% (+/-2). The Reserve Bank of India, which has kept interest rates unchanged amid rising inflation, has been facing calls to slash them in order to bolster flagging growth.
The exercise to update the base year is expected to be completed by year end and the CPI with a new revamped basket is expected to be rolled out by FY26, they said.
Food for thought
“Changes in food group composition could either increase or decrease inflation,” said Pronab Sen, former chief statistician.
Inflation is overstated because of food weightage, according to Madan Sabnavis, chief economist at Bank of Baroda. As income levels rise, people tend to spend less on food and more on discretionary items, he added.
According to the 2023-24 Economic Survey, vegetables contributed 30.6% to food inflation during the period, up from 7.3% in the year before. Other major contributors included cereals (33.3%), spices (18.3%), milk (14.3%), pulses (11.9%) and fruits (5.1%).
Vegetables among other food items add volatility to headline inflation figures, and reducing their weight would to an extent help stabilise the final impact on inflation numbers, said Sakshi Gupta, principal economist, HDFC Bank.
Since the weight of food items is expected to decline in the new series, they should have a lower contribution to overall inflation, even if the increase in food prices is of the same order, said Janak Raj, senior fellow at the Centre for Social and Economic Progress (CSEP). “A smaller weight attached to the weather-dependent food component would reduce volatility in headline inflation readings. This would likely translate to steadier headline inflation readings that tend closer to the RBI’s 4% inflation target,” said Aditi Raman, associate economist at Moody’s Analytics.
A weighty matter
Overall, the decline would be around 4-5 percentage points, said Paras Jasrai, senior economic analyst, India Ratings and Research. As per the HCES, food’s share in average monthly per capita consumption expenditure or MPCE dropped in rural areas to 46.4% in 2022-23 from 52.9% in 2011-12, while in urban areas, it fell to 39.2% from 42.6%.
The total number of food items tracked in the basket are over 120. The proposed exercise could also bring down the number of items in the basket.
