In a discussion paper, the ministry said the move would ensure an “appropriate reflection” of free distribution of food grains in the Consumer Price Index (CPI). The proposal has gained importance after the launch of the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) in January 2023, which provides free food grains to about 75% of the rural and 50% of the urban population.
Why include free social transfers in CPI
The paper noted concerns that the current CPI methodology does not capture the impact of free PDS distribution on inflation, as it excludes items provided at zero or reduced prices. Under existing practice, free items receive no weight since households bear no out-of-pocket cost, making their base and current prices zero. This approach, aligned with international norms, is consistent with the IMF definition of retail inflation.
However, the ministry said that unlike Western economies, the scale of social transfers in India is substantial and influences market prices. Since the CPI also guides wage and pension indexation and social welfare schemes, not just monetary policy, the exclusion of free food grains could distort the measure’s wider role.
What is the new methodology
The new proposal suggests applying a zero price while adjusting weights during the next series update. For example, rice prices would be compiled into a single index combining free PDS, subsidised PDS and open-market sources. The approach would apply to all PDS-distributed food items and ensure flexibility if prices change in the future.
The ministry has discussed the proposal with IMF experts, who said it would not mute price changes and would reflect adjustments should nominal prices be introduced for PDS items.
India plans to adopt the new CPI series, with 2024 as the base year, from March 2026.
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(Edited by : Poonam Behura)