| PYQ Relevance[UPSC 2023] Most of the unemployment in India is structural in nature. Examine the methodology adopted to compute unemployment in the country and suggest improvements. Linkage: Unemployment and inflation are core GS-3 macro indicators influencing growth and monetary policy. Just as CPI base revision affects inflation measurement, unemployment estimates depend on survey methodology (PLFS), shaping policy credibility and reform design. |
Why in the News?
The Ministry of Statistics and Programme Implementation (MoSPI) has decided a comprehensive exercise for revision of the base year of Gross Domestic Product (GDP), Index of Industrial Production (IIP) and Consumer Price Index (CPI) to enhance their relevance, accuracy and international comparability. The proposed new base year for the GDP and IIP is 2022-23, and for CPI the proposed base year is 2024. The revision of CPI will be done using findings from the latest Household Consumption Expenditure Survey (HCES). The revision recalibrates expenditure weights to reflect structural shifts in consumption patterns over the past decade. Since CPI is the anchor for inflation targeting and monetary policy, changes in its composition directly influence measured inflation and policy response. The exercise also gains significance after gaps in consumption data, making representativeness and credibility central concerns.
What is CPI and Why is it Important?
Consumer Price Index (CPI) measures the average change over time in the retail prices of a fixed basket of goods and services consumed by households. It reflects retail inflation and serves as the nominal anchor under India’s inflation targeting framework.
- Retail Inflation Measure: Tracks price changes at the consumer level across goods and services.
- Inflation Target Anchor: Forms the basis of RBI’s flexible inflation targeting framework.
- Cost-of-Living Indicator: Reflects purchasing power of households.
- Policy Benchmark: Guides interest rate decisions, wage revisions and welfare indexation.
- Macroeconomic Signal: Influences investor expectations and economic outlook.
Why Was Base Year Revision Necessary?
- Outdated Consumption Weights: 2012 basket no longer reflects current spending behaviour.
- Structural Economic Shift: Expansion of services sector and urbanisation since 2012.
- Consumption Diversification: Rising share of telecom, transport and service expenditures.
- Reduced Food Share: Relative decline in food and clothing weight in total expenditure.
- Data Discontinuity Concern: Delay in updated consumption data affected representativeness.
How Does the CPI Basket Reflect Structural Changes in Society?
- Shift from Goods to Services: Higher expenditure on communication, transport and service-based consumption.
- Urbanisation Impact: Changing food habits, mobility patterns and housing expenditure.
- Changing Aspirations: Rising discretionary spending relative to subsistence consumption.
- Technology Integration: Inclusion of modern consumption categories such as telecom services.
- Rural-Urban Convergence: Updated survey captures evolving rural consumption patterns.
- Declining Engel Ratio: Reduced proportional spending on food indicates income progression.
What Are the Macroeconomic Implications of CPI Base Year Revision?
- Inflation Recalibration: Weight changes can alter headline and core inflation trends.
- Monetary Policy Adjustment: RBI policy stance depends on CPI trajectory.
- Real Interest Rate Impact: Changes in measured inflation affect real returns.
- Fiscal Planning Effect: Influences subsidy indexation and welfare transfers.
- Market Signalling: Alters inflation expectations in financial markets.
- Credibility Enhancement: Strengthens confidence in official inflation statistics.
Conclusion
CPI base revision updates inflation measurement to reflect contemporary consumption patterns. It strengthens accuracy, improves macroeconomic signalling and supports effective monetary policy.
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