The government plans to change the base year for the Consumer Price Index for Industrial Workers (CPI-IW) to 2016 from 2001. This could mean further increase in Dearness Allowance (DA)/Dearness Relief (DR), when revised from next year.

Yearly inflation as represented by All India CPI-IW is key for calculating DA and DR. DA as a percentage of basic pay is paid to serving government officers and employees, while DR as a percentage of basic pension is for the retired officers and employees.

Amidst the pandemic, the government had decided to freeze DA/DR at current rates till July next year. The current rate is 17 per cent of basic pay/basic pension.

“Change in base year has been finalised and will be made official next week,” a senior government official told BusinessLine . This revision will make base year closer to current scenario and thus the rate of inflation will be more realistic, he added.

This index and the rate of inflation is released every month by the Labour Bureau under the Labour Ministry.

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Last updated data

The last updated data — the rate of inflation based on All India CPI-IW for August stood at 5.63 per cent.

However, a more broader retail inflation rate based on Consumer Price Index released by National Statistics Office with the base year of 2012 showed retail inflation at 6.69 per cent, retail food inflation at 9.05 per cent for August.

Since, the basket for CPI-IW is prepared by the Labour Ministry and the CPI is prepared by the Statistics Ministry are similar, a change in base year could narrow the difference between these two numbers and provide a more realistic base for calculation of DA/DR.

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 centres.

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The series was then, updated on base 1982=100 and a revision in 1999-2000 has further updated the base on 2001=100. The current series of CPI-IW with base year 2001=100 covers 78 industrially important centres spread across the country.

All India CPI-IW purports to measure the change in prices of goods and services consumed by index population over time in reference to a base year.

Officials listed number of reasons for the constant need to change this base year to a more recent one. The basic and essential frame work behind All India CPI-IW construction used in India is “theory of fixity “.

As it is needed to reflect the actual change in price level owing to changes only in macroeconomic environment, the obvious consequence is that every other parameter affecting price of the commodity has to be fixed for the entire life of a series.

So, according to officials, only changes observed are in the current price level. Such fixation may not be justifiable over a period of time due to changes that are bound to occur at various levels in these fixed parameters.

The change at any level can be reflected only while updating the base year where we can update any parameter of a commodity be it centre, market, shop or specification that may influence its price change, the official explained.