Consumer Price Index (CPI) Update and Housing Index Methodology
The Consumer Price Index (CPI) is crucial for gauging the economic pulse, aiding the Reserve Bank of India (RBI) in setting interest rates, and assisting the Government of India (GoI) in budget planning. To ensure that the CPI reflects current consumption patterns, the GoI is updating the CPI base year from 2012 to 2024 through a comprehensive reformative and consultative process.
Importance of Housing Services in CPI
- Weightage in CPI:
- Housing services hold a significant weight of 10.07% in the all-India CPI basket.
- They account for 21.67% in the urban CPI.
- MoSPI's October 2025 discussion paper suggests an overhaul in the housing index compilation methodology.
Proposed Methodological Changes
- Expansion to Rural Areas:
- Inclusion of rural areas in the housing index to address the data gap.
- Exclusion of Employer-Provided Dwellings:
- Current method uses surrendered house rent allowance and license fees, which do not reflect market rental values.
- Exclusion will eliminate distortions in the housing index.
- Use of Census 2011 Housing Frame:
- Provides a comprehensive frame of dwellings and includes employer-provided accommodation.
- Ensures rental equivalence for employer-provided dwellings.
- Survey Changes:
- Proposal to increase monthly surveyed dwellings from 4,000 to 24,000, raising costs with minimal informational gain.
- Suggested efficiency improvement by shifting to a 3-month moving panel instead.
- Aggregation Method:
- Proposal to use geometric mean for aggregation, which is more robust against outliers compared to arithmetic mean.
Analysis of Current Methodology
- Existing methodology is scientifically robust despite previous issues attributed to implementation choices, not methodological flaws.
- The current chain-based method is mathematically equivalent to the fixed-base method and transitive.
- The 6-month moving panel survey for rent collection is a standard international practice.
Conclusion
The existing panel-based methodology for the housing index is theoretically sound. Proposed changes need careful consideration to ensure they are methodologically robust, preserving the accuracy of India's inflation measurement, which is vital for informed monetary policy.
