Late last month, the government announced two major decisions. First, on October 28th The terms of reference of the 8th Central Pay Commission (CPC) have been approved. By the Federal Cabinet, giving the committee 18 months to make its recommendations. Two days later, the Department of Statistics issued a discussion paper seeking views on the changes it wants to make to how housing inflation is calculated as part of the Consumer Price Index (CPI) revamp.
The two issues may seem unrelated; After all, what could link a review of wages and pensions for central government employees to an element of inflation in the retail sector? As it turns out, the eighth CPC figure could turn India’s headline inflation figure on its head were it not for the changes proposed by the Ministry of Statistics and Program Implementation (MoSPI).
Measuring housing inflation
To measure housing inflation – which has a weight of 10.07 percent in the current CPI basket – the Ministry of Statistics surveys more than 13,000 homes in more than 300 cities. Of these houses, more than their price are houses given by the central and state governments and public sector institutions to their employees. This is where the problem begins, because the Ministry of Housing and Planning uses the house rent allowance given up by those living in these homes – along with the small license fees paid – as a substitute for the rent they pay to calculate housing inflation.
HRA does not depend on demand and supply but on the person occupying the house. If a government or PSU employee leaves the household surveyed by the Ministry of Social Security and is replaced by a more or less junior employee, the HR account goes down, leading to lower inflation – even though nothing has changed, except for the resident. The evaluation of human resources also changes when the salaries of government employees are reviewed, as will the eighth CPC. When this happens, the result can be somewhat confusing, not only for investors but even for policymakers – as was the case eight years ago.
The Seventh CPC Chaos
In June 2017, housing inflation and headline CPI reached 4.7 percent and a record low of 1.46 percent, respectively. Then, starting in July 2017, the recommendations of the Seventh Session of the Communist Party of China took effect, including a 105.6 percent increase in the human resources account for central government employees. The result? By June 2018, housing inflation was 8.45%, and overall CPI inflation was 4.92% – all because of the stroke of a pen, or a high risk estimate, because in reality, housing inflation has not actually doubled over the course of a single year. Policymakers at the Reserve Bank of India reacted the only way they could – by ignoring this rapid increase in inflation.
It took another year or so, until mid-2019, for housing inflation to cool below 5 percent. Since then, the percentage has trended below 4 percent – another mismatch. In the six quarters beginning in January 2024, CPI housing inflation averaged 3 percent. Meanwhile, house prices as per the Reserve Bank of India’s quarterly house price index rose by 6 per cent, and real estate company MagicBricks’ rental index rose by 20 per cent on average every quarter.
Proposed changes
To deal with these issues, the Ministry of Housing and Planning has proposed making some radical changes to how housing inflation is calculated when a new series of consumer price indexes are released starting in February.
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First, government accommodation and employer-provided homes will be excluded. Second, rental data will be collected on a monthly basis instead of every six months. Finally, housing inflation in rural areas will also be aggregated. “With the eighth Chinese Communist Party likely to deliver its recommendations within the next 18 months… the new composition of the housing CPI is relevant,” Nomura economists said in a note last week. While housing inflation may be higher next year, this will be because the data is “ultimately more representative of rent inflation on the ground”.
© Indian Express Private Limited
(Tags for translation) Inflation
