Govt proposes overhaul in CPI housing index: What’s changing, why it matters, and what happens next

The government plans to overhaul the way it calculates the housing component of the Consumer Price Index (CPI) to make the measure more accurate and representative of household spending, according to a discussion paper released on Thursday.

In the paper, the Ministry of Statistics and Programme Implementation (MoSPI) has proposed a set of sweeping changes that include expanding the housing index to cover rural areas, collecting rent data every month instead of every six months, and dropping employer-provided dwellings from the calculation.

The new methodology will form part of the upcoming CPI series that will replace the current 2012-based index, which is the main gauge for retail inflation used by the Reserve Bank of India (RBI) to set monetary policy.

“The proposed changes in the methodology are being done with the objective of making housing index more robust and representative,” the paper said, inviting public feedback by November 20.

Monthly rent collection, rural coverage

Currently, the CPI housing index, which carries a 21.67% weight in the urban CPI and 10.07% at the all-India level, is compiled only for urban areas because the 2011–12 Household Consumption Expenditure Survey (HCES) did not provide imputed rent data for rural households.

Under the new series, MoSPI proposes to include both urban and rural sectors, leveraging fresh data from the 2023–24 HCES that captures actual and imputed rents in rural households.

The paper also suggests collecting rent data from all selected dwellings every month, replacing the existing “panel approach” where only one-sixth of the sample was surveyed biannually.

The six-month chain-based method led to unexplainable fluctuations in monthly housing inflation.

Eliminating distortions from government housing

The ministry plans to exclude government and employer-provided accommodations, which often skew rent trends.

“In the case of employer-provided accommodation, information is collected on House Rent Allowance (HRA) and any other license fees paid by the employee to retain the dwelling. When an employee’s salary increases, the corresponding rise in HRA is reflected in the recorded house rent, thereby capturing an increase,” the paper said.

“However, when the employee vacates the accommodation and it is allotted to a junior employee with a lower HRA, it results in a lower recorded rent, which may incorrectly appear as a decline in rent or negative inflation. This, however, does not represent an actual decrease in rent prices,” it added.

The government said the proposed changes will help address distortions flagged by experts and the International Monetary Fund (IMF).

Unlike the current system, which used three different methods during its initial rollout in 2013, the new CPI series will apply a single, uniform “short-term” or chain index method from the start. The new approach also replaces the weighted geometric mean with a weighted arithmetic mean to align with other CPI components.

Weights for different dwelling categories will be based on Census 2011 data instead of the 2012 housing condition survey.

What’s changing

What happens next

MoSPI said the proposed methodology is being reviewed under the guidance of the Expert Group on Base Revision of CPI.

The proposed methodology, once finalised, will be part of the new CPI base year series under preparation.