Government launches new inflation index for working class
The new series has been necessitated by changing consumption habits, relative prices of various commodities as well as spending patterns of the country’s workforce in regular jobsUpdated: Oct 22, 2020, 13:53 IST
The government on Thursday unveiled a new series for the consumer price index for industrial workers (CPI-IW), a measure of inflation used to calculate dearness allowance for government employees, wages for industrial workers and dearness relief for pensioners. The new series will account for changing spending habits of the working class in the organised sector.
In the new series, the base year for calculating the CPI-IW has been revised to 2016 from 2001. The new series has been necessitated by changing consumption habits, relative prices of various commodities as well as spending patterns of the country’s workforce in regular jobs. The CPI-IW is the basis for calculating wages and pay perks of virtually the entire organised-sector workforce, including bank employees and insurance-sector employees.
The new index assigns more weight to spending on services such as education, healthcare, housing, travel and transportation, as expenditure on these items has increased compared to expenditure on primary articles such as food. This will help economists who calculate inflation to perceive a more accurate picture of a working-class household’s costs.
For instance, in the old index, the percentage weight assigned to food was 46.2%. In the new index, this has been brought down to 39%. This is in keeping with an economic theory known as Engle’s law, which states that as a household’s incomes rises, the percentage of income spent on food declines relative to other expenditure.
Due to an increase in housing costs, the new index has increased the percentage weight assigned to housing from 15.2% to 16.8%. Similarly, the percentage weight assigned to the miscellaneous category, which includes important heads such as education and healthcare, has been increased to 30% from 16% in the old series.
In any inflation index, the base year is the first year of an inflation index, with an index value of 100. Inflation indices of all other years are then compared to the base year to see how prices increase or decrease. An inflation measure represents the percentage change in this index.
Releasing the new index, employment and labour minister Santosh Gangwar said: “The CPI-IW is one of the most important economic indicators of the country because it captures inflation faced by lakhs of workers. This index is used for many economic policies. It is a historic index, which is being released continuously every month since 1946.”
The CPI-IW rose by 5.6% in August, compared to a 5.3% increase in July, according to the latest available data. Inflation for the month of September 2020, which is due, will be calculated based on the new series.
The government has said that the index would be revised every five years and salaries or dearness allowance would not rise immediately. “That will depend on inflation dynamics in the long run and once the detailed methodology is released, it will be possible to comment on the changes,” said Ashok Grewal, a labour economist who advised the erstwhile Planning Commission.
India currently has five consumer price indices (CPIs), three of which are working-class specific. These are CPI-IW for industrial workers, CPI-AL (base 1986-87) for agricultural labour and CPI-RL (base 1986-87) for rural labour. There is also CPI-Urban and CPI Rural. The combined rise in retail prices is captured by CPI Combined. CPIs AL and RL are used to fix minimum wages of agricultural labourers and rural unskilled employees.