SC Garg, the secretary of ministry of statistics and programme implementation, made a significant announcement during a recent interview in a daily newspaper. He said that the Government was ready to launch a new consumer price from February 2026. The timing was interesting: Soon after Finance Minister Nirmala Sitharaman presented the Union Budget. An overhaul of the existing inflation index was overdue because the existing one comprises many items that are obsolete and redundant in today’s world.
At present, the Consumer Price Index includes nearly 300 items, each of which has its weightage. Given the weightages across this large number of products, and the rate at which the individual prices rise, the specific price index for the week, month, quarter, and year is calculated. Hence, the announcement of a new, spruced up index, hopefully of a lesser number of goods, and more meaningful weightages, is significant and welcome. However, as usual, it throws up, once again, conflicts and challenges which economists, policy makers, and others face while measuring retail inflation.
Let us take an example. According to the present consumer index, to calculate the figures for rural consumers, the weightage of food articles is a high 54.5 per cent. In the case of urban households, it is only 36 per cent. Of the 54.5 per cent for the rural buyers, 60 per cent, or 33 per cent, is accounted for by cereals and vegetables. In effect, in an average and normal rural household, Rs30 out of Rs100 expenditure is spent on buying cereals and vegetables.
There is a contradiction right at the beginning of these assumptions. Since the pandemic, the Government has provided five kgs of free cereals to 800 million Indians. If 800 million get their requirements free of cost each month, there is no question of including cereals in the calculations of retail inflation. The beneficiaries, which includes half of the country, will not be bothered about cereal prices, if their monthly needs are met by the free rations.
Now, consider vegetables. If one lives in a village, or spends some time there, one realises that tomatoes may cost Rs40 a kg in a metro, but the price is possibly Rs20 in a village. This is the difference between the real prices in a village and city. The reasons are obvious: Middlemen, and arbitrage factors hike the prices multiple times during the journey from the rural production areas to urban consumption ones. Clearly, there are contradictions in place, and these need to be sorted out to make more efficient calculations for inflation, and to design an effective price index.
At present, there are several retail consumer price indices. There is one for industrial workers, another for agricultural workers, and one for non-manual workers, apart from those for rural and urban areas. The numbers seem logical if one agrees with the economists and designers that the basket of articles consumed by the various categories differ. A rural farm labourer with no land has a consumption basket that is possibly drastically different from that of a junior manager, who works in an office in a bustling city.
But here too, there are a few oddities. One of them lies in the threshold of poverty that is considered before we measure the consumer price indices. For example, how many Indians are poor because for them any increase in the prices of essential items comes with a higher burden. According to the World Bank, the newly-designated parameter of expenditure for a poor household is $4.2 per day. This daily per capita spend translates into an average daily family spending of Rs1,500 or so.
According to the World Bank, the average size of an Indian family is four. Now, Rs1,500 a day works out to Rs45,000 a month, or just under Rs5,50,000 a year. By these computations, the number of Indian households below the poverty line is 25 per cent, or 350 million people. A fourth of the Indians are still poor, as per the World Bank, which categorises the country as a low-income nation.
Of course, the Indian calculations are different. Depending on who you believe, the number of poor is not more than 100 million people. Given that the country’s per capita income is less than Rs2,50,000 a year, the figures may be nearer to those of the World Bank, rather than the Indian ones. The per capita income in several states is above Rs3,50,000, which is the poverty threshold for middle-income nations. Given the complexities, I suggest that we need to forget such categorisations, and talk about two consumer price indices.
To begin with, let us take out the 350 million poor, as pinpointed by the World Bank, out of the context. India needs to target this section as the major beneficiaries of free rations, free housing, free education, free healthcare, and efficient social security net. There is no reason to give free rations to 800 million. The latter happens because of electoral equations, as both the central and state governments chase voters, and wish to create sustainable vote banks.
Inflation does not, or should not, matter to the poor, who live from hand-to-mouth, and depend on the Government’s or other largesse to survive. One can easily take out another 200 million Indians from the inflation indices. These are, what I call, Inspirational Indians. They constitute the middle- and upper middle-class sections, who have possibly escaped the clutches of poverty.
They hopefully lead a fairly-decent lifestyle, with a decent standard of living. Most can afford a four-wheeler, and many change their smartphones every few years.
From this category of 200 million emerge individuals and families that indulge in expensive annual or once-in-two-year vacations. These middle-class and rich sections need a consumer price index of their own, given their peculiar consumption patterns. Their basket of goods may include higher levels of discretionary spend on entertainment, expensive education, electronics and digital goods, and high-end home and kitchen appliances. They can easily have a unique and innovative Inspirational Consumer Price Index.
This leaves us with a balance of a billion people. They constitute the bulk of Indians, and are probably part of real India. They are the drivers of economic growth based on consumption of normal and average goods and services. This is, what I call, the Aspirational Indians. They need the real price index, an Aspirational Index, which will be the bell-weather one for the country. Once such simple definitions are made, it is easier for policy makers, economists, and others, not just to calculate poverty but to suggest measures which will propel and uplift the aspirational Indians.
The author has worked for leading media houses, authored two books, and is now Executive Director, C Voter Foundation