UPSC Syllabus: Gs Paper 3- Indian economy
Introduction
India has updated the Consumer Price Index after more than a decade to reflect major economic and consumption changes. The new series uses base year 2024 and consumption patterns from Household Consumption Expenditure Survey 2023–24. Changes in spending behaviour, growth of services, digital markets, and reduced food expenditure made revision necessary. The updated CPI aims to provide a more realistic, stable and representative measure of inflation for households and policymakers.
What is the Consumer Price Index (CPI)?
The Consumer Price Index measures the changes over time in general level of retail prices of selected goods and services that households purchase for the purpose of consumption.
Policy guide: CPI guides income adjustments, social security measures and monetary policy decisions, including interest rates.
Economic mirror: It converts everyday price experiences into an official indicator of inflation.
Published by: The index is published by the Ministry of Statistics & Programme Implementation. The Field Operations Division of the National Sample Survey, under MoSPI.
Structural Changes in the New CPI Series
- Base year: The new CPI uses 2024 as base year, replacing 2012, and reflects consumption patterns of HCES 2023–24.
- Revised Item Basket: The number of weighted items has increased from 299 to 358 at the all-India level, with goods rising from 259 to 308 and services from 40 to 50, which improves the representation of present consumption patterns.
- Market coverage: Price data is collected from 1,465 rural markets and 1,395 urban markets, with inclusion of 12 online marketplaces.
- COICOP 2018 Adoption: The series follows the Classification of Individual Consumption According to Purpose 2018, which replaces 6 broad groups with 12 divisions, 43 groups, 92 classes and 162 sub-classes for better classification and global comparability.
- Food weight: Food and beverages weight reduced to 36.75% from 45.86%, reflecting lower share in household spending.
- Housing expansion: Housing now includes water, electricity, gas and fuels, with weight rising to 17.67% from 10.07%.
- New Items Added: Items such as online media services, value added dairy products, barley and its product, pen-drive and external hard disk, attendant, babysitter and exercise equipment are included in the basket.
- Outdated Items Removed: Items like VCR or DVD player, radio, tape recorder, second-hand clothing, CD or DVD cassettes and coir rope are removed from the basket.
- Digital Data Collection: The series introduces Computer Assisted Personal Interviewing and includes e-commerce prices, online sources and administrative data to improve data quality, timeliness and coverage.
- Methods Used
- The Jevons index (geometric mean of price relatives) is used for compiling elementary indices at the item level.
- The Young or Modified Laspeyres’ index is used for compiling higher level indices.
- This dual-stage methodology ensures accurate, consistent price measurement.
Significance of the Revised CPI
- Realistic inflation: Updated basket and weights ensure inflation reflects current consumption patterns. As Spending behaviour has changed due to economic transformation, digital markets, service expansion and free foodgrain distribution to 80 crore households.
- Lower volatility: Reduced food weight makes headline inflation more stable because food prices are highly volatile.
- Policy accuracy: RBI’s Monetary Policy Committee gets a clearer inflation picture for interest rate decisions.
- Fiscal predictability: More stable inflation improves Budget planning and index-linked payments like dearness allowance.
- Service relevance: Greater service coverage reflects structural change in the economy.
- Better comparison: Alignment with international standards supports global inflation comparison.
- Household relevance: CPI continues to capture how price changes affect daily life and spending.
- Improved data quality: Wider sources and digital collection improve timeliness and accuracy of price information.
- Economic calibration: Inflation signals are more closely matched with prevailing economic conditions.
Operational Issues
- Limited history: Earlier index values are not fully available, so historical comparison is difficult.
- Partial back data: Index values exist from January 2025, but year-on-year comparison is possible only for January 2026.
- Linking factor: MoSPI provides a linking factor to estimate earlier data instead of full back series.
- Data transparency: Providing complete back data would ease comparison across time.
- Revision cycle: CPI should be revised every five years instead of long gaps like the previous eleven years.
Conclusion
The updated CPI reflects changing consumption, expanding services and digital markets, making inflation measurement more realistic and stable. It strengthens monetary and fiscal decision-making while preserving the link with household experience. Regular revision and full historical data will further improve transparency, comparability and reliability of inflation measurement in the future.
Question for practice
Discuss how the new series of the Consumer Price Index (CPI) reflects changes in India’s consumption patterns and why it is important for economic policy and inflation measurement.
Source: The Hindu
