MoSPI proposes to add free PDS items to inflation index

The ministry of statistics and programme implementation (MoSPI) released a discussion paper suggesting that free food grains distributed under the Public Distribution System (PDS) be factored in the Consumer Price Index (CPI).

The paper recommends creating a single commodity index by combining PDS prices (zero or subsidised, weighted by consumption categories) with open market prices. Free items would be treated as having a zero price, so their impact, including downward pressure when they become free, is captured in inflation estimates.

The proposed methodology was also discussed with the International Monetary Fund (IMF) expert in the Technical Assistance Mission held on August 11-14, according to the discussion paper 2.0.

"The IMF expert was of the view that the proposed method does not mute price changes for rice, wheat and other items distributed through PDS. It would fully reflect price changes, should nominal prices be introduced for the PDS products. The methodology does not overstate or distort price changes," it said.

The last discussion paper was published in December 2024.

According to official data released last month, India's retail inflation rose to 2.1% year-on-year in August from an eight-month low of 1.6% in July, as food prices increased.

The ministry of statistics and programme implementation is currently revising the CPI base to 2024 from 2012, with weight of items based on the Household Consumption Expenditure Survey (HCES) 2023-24.

In the present CPI series, free items are excluded as households record zero expenditure on them, giving these commodities no weight in the index.

Various discussions about inclusion of PDS items in CPI were held with the IMF, World Bank and UNECE's Group of experts on CPI and MoSPI's Expert Group on the base revision of CPI.

"Experts were of the view that considering the scale and impact on household consumption patterns and taking into account the purpose of CPI (not restricting it to only monetary policy), free PDS items should be appropriately accounted for within the Indian CPI framework," the discussion paper mentioned.

The point on inclusion of PDS items in CPI is crucial considering the policy changes such as the launch of Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) in January 2023, a food security scheme to provide free food grains to eligible households for one year, the paper noted. The scheme covers nearly 75% of the rural population and 50% of the urban population.

While such social transfers may be minor in Western countries, they are both widespread and influential in shaping market prices in India, according to the paper.

Further, it said CPI serves a dual role as a principal indicator for the monetary policy framework of the central bank and as a proxy for tracking changes in the living cost and for wage indexation, pensions, and welfare schemes.