How CPI in India works
Definition of Consumer Price Index
This is a measure of calculation to estimate the change in prices of a basket of goods and services consumed by a defined population group in a defined area with respect to the base year. This basket of goods and services actually represents the cost of living of the consumers at a defined level of their income and prices.CPI measures the variation in prices of retail goods and services paid by consumers. This means that CPI in India considers the change in price factor only. It is calculated by taking price changes of a predefined basket of goods and services and averaging them.
CPI in India is one of the most widely used (Around 187 countries in the world) economic indicator for identifying Inflation or Deflation. This is also known as the barometer of Inflation in India.
In 2013 CPI in India replaced the Whole Sale Price Index(WPI) as a main measure of inflation. It was proposed by the Urjit Patel Committee to abolish WPI and introduce CPI in India, which actually exhibits the hardships faced by the consumers due to the effect of inflation. The Reserve Bank of India (RBI) has mandated using CPI as the sole indicator of inflation for its monetary policy.
⇒How CPI in India is calculated
Currently, CPI in India is calculated by taking a basket of 299 commodities as compared to 676 commodities in WPI. Basically, CPI is calculated by considering the retail price change of goods and services and by taking the average weighted value of each item in the basket. The formula is given below. Also Read:
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⇒Who calculates CPI in India
The Ministry of Statistics and Programme Implementation (MOSPI) calculates the CPI for the country as a whole and for individual states. Also, the Labour Bureau of India defines CPI in India in three main categories.
- CPI for Industrial Worker: Among the three indices used by Labour Bureau, the CPI IW has a lot of significance. As this has a wider demographic area and almost covers all the states. Whereas, CPI-RL and CPI-AL cover only 20 states. Currently, the Labour Bureau considers 2001 as the base year for CPI IW calculation. A wider coverage area of 78 selected centers and an array of commodities make the CPI IW as the perfect indicator of Cost of living Index. Most importantly, CPI in India is used to determine the Dearness Allowance of Central Government employees.
- CPI for Rural Labourer: This index shows the CPI data for Rural Labourers. A person who is engaged in manual works in rural areas in agricultural and non-agricultural occupations for cash or in kind or partly cash or partly in kind is known as Rural Labourers. The base year here is 1986-87.
- CPI for Agricultural Labourer: A person is called an agricultural labourer if he is engaged in one or more agricultural occupations as a labourer on hire for cash or in kind or partly cash or partly in kind. The base year is 1986-87.
Since the CPI RL/AL does not correctly provide inflation data for the whole population, the Ministry of Statistics and Programme Implementation started compiling new CPI data from 2011. One is called CPI -U for the urban population and the other one is known as CPI -R for the rural population. All these indices are compiled at the States and National levels.
Final Word on Consumer Price Index.How CPI in India works
Finally, I would say that since WPI does not take into consideration the cost of services paid by the consumers for measuring inflation, CPI is the ideal tool to measure actual inflation figure around the whole country and which is widely accepted all over the world.
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