Govt considers including free PDS items in new CPI basket

The government is deliberating whether free items distributed under the Public Distribution System (PDS) should be incorporated into the basket for calculating the Consumer Price Index (CPI), a move that could significantly alter the inflation calculation methodology in the future.

This proposition is part of a discussion paper released by the Ministry of Statistics and Programme Implementation (MoSPI) as it works on a new CPI series with 2024 as the base year. Stakeholders have been invited to provide their feedback by January 15, 2024, with the updated CPI expected to roll out in the final quarter of FY26.

The inclusion of PDS items in the CPI basket is a significant topic of debate due to its implications for headline inflation. Currently, international norms exclude free goods and services from inflation indices since they do not involve a direct cost to the consumer. Adhering to this principle, the existing CPI series does not account for PDS-distributed items, such as free food grains. However, redistributing their weights within the CPI basket has, at times, led to temporary inflation spikes.

The discussion paper outlines three possible approaches:

Include PDS Items at Zero Price: This would reflect the distribution of free items in the inflation index while allowing for future adjustments in weights. This option is being actively considered by the government, as it could help reduce headline inflation figures.

Maintain Current Exclusion Policy: Under this approach, PDS items would remain excluded, as per international definitions. The weights of excluded items would continue to be redistributed within their respective categories, as has been the practice.

Exclude PDS Items with Broader Redistribution: Similar to the current method, but with weights redistributed across all categories in the CPI basket rather than confined to the same class or section.

The Chief Economic Advisor (CEA) has long advocated for better representation of the vast PDS market in inflation metrics. With significant free food grain distribution occurring, particularly during times of economic stress, the government believes that incorporating these items could present a more accurate picture of consumer price dynamics.

However, the transition to the new CPI series comes with caveats. Even if PDS items are included, the updated methodology will only come into effect in late FY26. Additionally, stakeholder feedback will play a crucial role in shaping the final approach.