CPI-IW revised from the base year 2001 to 2016: Does it impact your salary or pension?

The Union government on Thursday revised the base year for computing Consumer Price Index (Industrial Workers) (CPI-IW) from the present 2001 to 2016 after a gap of 15 years. Presenting the report on the base revision of Consumer Price Index for Industrial Workers (CPI-IW) to 2016=100 from existing 2001=100, Union Labour Minister Santosh Kumar Gangwar said the base revision will be done every five years in future. The new series is more representative in character and reflects the latest consumption pattern of the industrial workers,” the Minister added. The Minister also released the maiden index with the base year 2016 for the month of September 2020. In the new 2016 series, 88 centers have been covered as against 78 centers in the 2001 series. The sample size for the conduct of Working-Class Family Income and Expenditure Survey, on the basis of which weighting diagrams have been derived, was increased to 48,384 families from 41,040 in the 2001 series, he said. The new series of CPI-IW would be more comprehensive as it would have over 300 items in its basket-like health, education, food compared to 200 in the existing index.

The CPI-IW is used as a benchmark for measuring the Dearness Allowance (DA) payable to government employees, dearness relief for pensioners, and wages for industrial workers in the organised sector including PSUs, banks, and insurance companies.

Under the new 2016 series, the weightage for the food group has gone down to 39.17 per cent from 46.2 per cent in the 2001 series. Spending on housing spending on housing will get almost 16.87% weights as against 15.27% earlier. Spending on Clothing and footwear has changed to 6.08% from earlier 6.57%. Among consumption categories, a segment comprising spending on heads like education, health, and transport by workers has been given a sizable jump in weight from 23% earlier to 30% in the 2016 series. Weight of fuel and light segment will now have a weight of 5.5 per cent as against 6.43 per cent earlier, while pan, supari, tobacco, and intoxicants will hold 2.07 per cent weight as against 2.27 per cent.

To make the new series comparable with the older one, the Ministry stated that it has to be calculated using a linking factor of 2.88. Taking this into account, the CPI-IW for September is 118, and with the linking factor it works out to be 339.8 as against 322 in the corresponding period last year in the earlier series.  However, according to the opinions of people in the know, a linking factor of 2.88 while shifting the base year 2001 to 2016 (after 15 years) is aggressive undervaluation and suppression of impact on price changes. This is because the linking factor for 1982/2001 (gap of 19 years) was 4.63 and for 1960/1982 (gap of 22 years) was 4.93. Applying the Ratio of Conversion, the Linking Factor should be not less than 3.35 to 3.65 for shifting the base year 2001 to 2016.  

The government, however, said that the dearness allowance, which is linked to the Consumer Price Index for Industrial Workers (CPI-IW), will remain unchanged for now. The government, via an office memorandum dated April 23, 2020, announced its decision to put on hold the hike in dearness allowance (DA) for government employees, pensioners put on hold till July 2021 due to coronavirus impact. As it is needed to reflect the actual change in price level owing to changes only in the macroeconomic environment, the obvious consequence is that every other parameter affecting the price of the commodity has to be fixed for the entire life of a series, it said.

Consumer Price Index or CPI as it is commonly known as an index measuring periodical retail inflation in the economy based on the change in prices of a fixed list of common goods and services (market basket) used by consumers like food, housing, apparel, transportation, electronics, medical care, education, etc. This can be further used to compute the cost of living. This also provides insights as to how much a consumer can spend to be on par with the price change. All India CPI-IW was first introduced on scientific lines with base 1960=100 which was based on the results of the Family Living Survey conducted in 1958-59 at 50 industrially important centers. The Price Index base years are as follows.

1939==100, 1944==100, 1949==100

1960*==100, 1982==100, 2001==100

Latest base year 2016=100

*All India CPI-IW was first introduced on scientific lines with base 1960=100 which was based on the results of Family Living Survey conducted in 1958-59 at 50 industrially important centers. To convert 1960 Series =100 into 2001 series =100 the figures under 2001=100 is to be multiplied by the Factors 4.63X4.93

For example, the CPIN for August 2020 is 338. To convert this figure of 338 into Series of 1960=100, we have to multiply it by 4.63X4.93X338== 7715.15

Taking this into account, the CPI-IW for September is 118, and with the linking factor, it works out to be 339.8 as against 322 in the corresponding period last year in the earlier series.  But to calculate actual changes with reference to the base year 1960 into 2016 (The base year 1960 is used for calculation of periodical DA/DR to bank staff and pensioners) we have to multiply 4.63X4.93X2.88 X118=7717.15.

From the above calculation, we may observe that not many changes have taken place between the earlier series 2001 and the latest series 2016 for the purpose of calculation of DA to salaried class and Dearness Relief to Pensioners. The revised index number according to the bureau is reflecting actual changes in every other parameter affecting the price of the commodity. However, Labour Bureau explained that the hike in salaries of industrial workers and government employees will depend on the behavior of the new series, which is too early to predict at this stage.