Blasé Capital ROTI TO OTT

This is how a media report described India’s change to a new basket, and calculations, to measure consumer inflation. “The revision of the basket does not merely refine how inflation is measured but indirectly captures how Indian households are spending differently than they did a decade ago. The most striking signal is the reduced weight assigned to food, and the greater emphasis on services, housing, and modern consumption categories such as OTT. This shift, from roti to OTT, so to speak, reflects an economy in transition from subsistence-heavy spending towards more diversified and discretionary consumption,” it stated. In the columns on this page, we have routinely argued that the country’s numbers on growth, inflation, and others are fraught with problems because they do not consider the scenarios in post-reforms India. The society, and specific classes and communities have dramatically changed their consumption patterns, and the baskets and calculations were way behind the ground realities.

The new inflation figures include two critical ingredients. First, the anchor for the expenditure has shifted from the earlier 2011-12 base year to 2024. Thus, the calculations will change based on current expenditures and prices, rather than applicable more than a decade ago. Since 2012, the world has changed, especially in urban areas, and many rural pockets. Families’ consumptions seem weird and bizarre to people who hail from an earlier generation. More importantly, the new inflation base includes a range of services, which have become crucial in our daily lives. Thus, prices from online platforms are factored in. Items such as OTT, airfares, and telecom plans form a part of it. Of course, outdated and irrelevant products like video cassette recorders (has the youth even heard of it?), cassette players (now what is that?), and coir ropes are out the window, and out of the inflation basket.

Apart from the substitution effect, the weightage effect becomes important. While the first replaces some of the old items with new ones, the second reduces the significance (or weightages) of some of the old items in the newly-composed basket for inflation. Take food, for instance, whose weightage is down from 46 per cent to 37 per cent. This does not imply that the spending in absolute terms is down. It means that as a percentage of the overall householding spending, food accounts for a lower value, as the percentages of other new categories rise faster. Such thinking, and recalculations link with accepted economic principle that as incomes rise, and households become more prosperous, the “proportion of incomes spent on food declines.” One can see this in one’s own family where, despite outside ordering and dining out, the grocery bills, as a percentage of overall spends, are down. This explains why most experts feel that GST 2.0, with its enlarged focus on items of regular consumption, will impact household budgets minimally.

There is another effect of lower weightage on food. Some economists feel that this enables the inflation numbers to be less volatile, and more stable. Food prices fluctuate wildly, as Indian farming is still heavily dependent on the monsoons, and natural causes, and is prone to global trends due to high imports and exports. In practically every season, there is news about oversupplies or shortages in some crops. In many cases, prices slump or zoom within weeks and months, which have political ramifications. A lower weight on food dents this seasonal and annual volatility. However, the flip side is that the prices of new items are less volatile in terms of regularity, but more disruptive when they happen. Telecom plans suddenly shift from being free to being paid ones. OTT discounts either vanish suddenly, or the number of users per subscription is restricted to force people to shift the more expensive premium plans. This may happen less regularly than the changes in food prices, but when they do, the implications are immense.

Let us look at housing, as rural rentals were not included in the earlier basket. Most middle-class urban families pay 30-40 per cent of the incomes on rent, especially in the case of single-earning members. In rural areas, the concept of rent did not exist for the inflation numbers, as the traditional thinking was that rural folks invariably have their own roofs over their heads, even if they ramshackle, make-shift ones. The new inflation basket includes rural rents, which acknowledges formal trends in rural areas. In many semi-urban and rural areas, there is a huge category of permanent and temporary workers and professionals who rent spaces, either for years, or a few months. The growing services sector is as expansive in urban and rural areas, and the latter trend implies payments on rents to pursue the services. The shift to inclusion of services is a game-changer in inflation.

One can, therefore, explain the inclusion of several services, which were considered unique, niche, and irrelevant earlier, like babysitting. Of course, even lower classes now fly to their native towns and villages, and possess a smartphone, or semi-smart ones. For example, during the recent SIR issue, temporary workers were given minimal time to report to their constituencies, and took expensive flights. “This shift towards services is characteristic of economies transitioning from lower-middle-income to middle-income status (as is India),” states a media report.