Informist, Tuesday, Sep 24, 2024

--Sources: Govt housing to be excluded from new CPI inflation series

--Source: New CPI methodology to only consider private house rent

By Siddharth Upasani and Shubham Rana

NEW DELHI – In a far-reaching move that will reduce statistical aberrations in India's headline retail inflation rate, government housing is set to be excluded from the new CPI basket, according to two persons aware of the development.

"There was an expert committee which looked at it and suggested that government housing be removed," a government official told Informist on the condition of anonymity. The ongoing exercise of updating the base year and basket of the CPI would "incorporate all the issues that have been talked about but were not being implemented", the official said.

While government housing – central, state, and those provided by public sector undertakings to their employees – makes up less than 1.5% of the entire CPI basket, it has in the past exerted an outsized influence on the headline inflation rate due to the methodology that is used to calculate housing inflation. For instance, consider the 105.6% increase in central government employees' house rent allowance in mid-2017, as recommended by the 7th Central Pay Commission. This led to housing inflation jumping from 4.70% in June 2017 to 8.25% by the end of the calendar year, with headline inflation rising in tandem from an all-time low of 1.46% to 5.21% in December 2017.

The use of house rent allowance as a proxy for rent in case of government housing is also conceptually problematic as housing inflation then is determined by the occupant and not demand-supply forces. If a government employee living in a house is replaced by a junior staff, the 'rent' of that house – assuming it is part of the statistics ministry's sample – would fall because the new occupant's house rent allowance is lower.

As part of the current process, the Ministry of Statistics and Programme Implementation surveys thousands of dwellings in 310 towns in India to arrive at the housing inflation rate. Of these dwellings, around one in seven are quarters provided by central and state governments as well as public sector undertakings to their employees.

"What we want to capture is housing inflation. But in the current methodology, the use of government accommodation creates a distortion," the second source said. "So, this has been resolved for the new CPI series by not considering government housing at all. The government housing sector is, anyway, really small. And the point of housing inflation is not to calculate the inflation for government housing, it is for all housing," they added.

FAR FROM REALITY

A change in the manner in which India's housing inflation is calculated is overdue, given that ground realities have been at odds with what the CPI has been saying. According to the statistics ministry's data, housing inflation has been under 6% for nearly six years. However, this seems removed from reality, with plenty of evidence that house rents have increased extremely sharply in the last couple of years. In fact, Magicbricks' Rental Index shows house rents in India were up 14.6% year-on-year in Apr-Jun. CPI data shows housing inflation was just 2.6% in the same period.

According to the second source, the new methodology will see only private sector housing being considered to calculate inflation.

"There will be three-four categories within this on the basis of home area," the source said.

While such a move may push up overall inflation on its own, the influence of housing on headline inflation may also increase in the new CPI inflation series on account of an increase in its weight. As per the Household Consumption Expenditure Survey for 2022-23 (Aug-Jul), rent made up 6.56% of monthly per capita expenditure in urban areas, up from 6.24% in 2011-12 (Jul-Jun). Rural India too saw an increase in the share of house rent to 0.78% from 0.45%.

At present, housing is only a part of urban inflation due to there being a minuscule number of rented homes in rural areas. According to the first source, it is still being considered if the new CPI series will have a rural component for housing. End

Edited by Avishek Dutta

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