​Moving on: on India’s Consumer Price Index and a new base year

Context & The Gist

The article discusses India’s upcoming revision of the Consumer Price Index (CPI), its primary measure of retail inflation. This is in the news because the current CPI series, based on a 2012 base year, is increasingly seen as inaccurate and failing to reflect the actual inflation experienced by consumers. The central thesis is that updating the base year to 2024 and incorporating new consumption patterns from the Household Consumption Expenditure Survey 2023-24 is crucial for more effective policymaking, particularly for the Reserve Bank of India (RBI) in formulating monetary policy.

Key Arguments & Nuances

• Data Discrepancy: The official CPI figures (1.33% in December 2025) significantly diverge from household perceptions (6.6% expected inflation) and economic indicators like slower private consumption growth.
• Outdated Weightages: The 2012 base year doesn’t reflect current consumption patterns, especially considering the impact of government subsidies. This leads to an inaccurate representation of price changes.
• Statistical Peril: Aggregating price levels across a diverse country like India inherently loses nuances, but an outdated CPI exacerbates this issue.
• Impact on Policy: The inaccurate CPI data can mislead policymakers, particularly the RBI’s Monetary Policy Committee, in making informed decisions about interest rates and monetary policy.
• Base Effect: Recent low inflation figures are partially attributed to a favorable base effect from high inflation in the previous year, which will diminish over time.

UPSC Syllabus Relevance

• Indian Economy (GS Paper III): Inflation measurement, monetary policy, and their impact on economic growth.
• Government Budgeting (GS Paper III): Understanding how inflation data influences government spending and fiscal policy.
• Data and Statistics (GS Paper I/III): The importance of accurate data collection and analysis for effective governance.

Prelims Data Bank

• CPI Base Year: Currently 2012, being revised to 2024.
• Household Consumption Expenditure Survey: 2023-24 data will be used for new weightages.
• RBI Inflation Target: 4% with a +/- 2% tolerance band.
• Monetary Policy Committee (MPC): Six-member committee responsible for setting the RBI’s monetary policy.
• Core Inflation: Inflation excluding volatile food and fuel prices.

Mains Critical Analysis

The core issue highlighted is the disconnect between official inflation data and the lived experience of consumers. This discrepancy undermines the credibility of economic indicators and hinders effective policy formulation. The outdated CPI series, with its 2012 base year, fails to capture the evolving consumption patterns and price dynamics in India.

Challenges

• Data Collection Complexity: Gathering accurate price data from diverse regions and retail outlets is a logistical challenge.
• Informal Sector: Accurately capturing price changes in the informal sector, which constitutes a significant portion of the Indian economy, remains difficult.
• Weightage Determination: Determining appropriate weightages for different goods and services in the CPI basket requires robust data and analysis.
• Perception vs. Reality: Bridging the gap between perceived inflation (household expectations) and actual inflation (official data) is crucial for maintaining public trust.

Opportunities

• Improved Policy Making: A more accurate CPI will enable the RBI to make more informed monetary policy decisions, leading to better inflation control and economic stability.
• Enhanced Transparency: Updating the CPI methodology and making data more accessible will enhance transparency and accountability.
• Better Economic Forecasting: Accurate inflation data will improve economic forecasting and allow for more effective planning.

A critical gap lies in the delay in updating the CPI. The IMF’s recent assessment (see Context & Linkages) underscores the detrimental impact of outdated data on economic surveillance. The government’s commitment to updating the CPI is a positive step, but timely revisions are essential to ensure its relevance and accuracy.

Value Addition

• Alagh Committee (1991): Recommended the use of the CPI as the main measure of inflation in India.
• RBI’s Inflation Expectations Survey: Provides insights into household perceptions of inflation.
• National Statistical Office (NSO): Responsible for collecting and releasing CPI data.

Context & Linkages

This past article from November 2025 highlighted the same issues of low measured inflation (0.25%) despite high perceived inflation (7.4%). It emphasized the urgent need for CPI revision due to the high base effect and outdated weightages, foreshadowing the current update to the 2024 base year.

The December 2025 article further reinforced the concerns about low headline inflation driven by base effects and the need for a new CPI series. It also noted the RBI’s interest rate cut and the potential need to pause further cuts pending the release of the updated CPI data, directly linking to the current discussion.

The IMF’s ‘C’ grade for India’s national accounts statistics, reported in November 2025, directly relates to the CPI issue. The outdated base year was identified as a key deficiency hindering accurate price movement capture and impacting monetary policy, providing a broader context for the current CPI revision.

The Way Forward

• Regular Updates: Establish a mechanism for regular CPI revisions (e.g., every 5 years) to ensure it remains relevant.
• Improved Data Collection: Invest in technology and infrastructure to improve the accuracy and efficiency of data collection.
• Expand Coverage: Include a wider range of goods and services in the CPI basket to better reflect consumption patterns.
• Address Informal Sector: Develop methodologies to accurately capture price changes in the informal sector.
• Communication Strategy: Improve communication with the public about the CPI methodology and its limitations.