Price trends in India and their implications for measuring poverty

The Indian national sample surveys collect data on the unit values of a large number of foods which can be used to compute price index numbers that can be compared with the official national price indexes, the Consumer Price Index for Agricultural Labourers (CPIAL) for rural India, and the Consumer Price Index for Industrial Workers (CPIIW) for urban India. Over the five years from 1999?2000 to 2004-05, the food component of the CPIAL understated the rate of food price inflation. This overstatement is likely attributable to the use of long outdated weights (from 1983), and the resultant overweighting of cereals, particularly coarse cereals, whose prices fell relative to other foods. The overall weight of food in the CPIAL is also too large, so that the growth in the general CPIAL was understated during this period when food prices fell relative to nonfood prices. Under conservative assumptions, I calculate that the 5 year growth in the reported CPIAL of 10.6 percent should have been 14.3 percent. Indian poverty lines are held constant in real terms and are updated using the food and non-food components of the official indices weighted by the food shares of households near the poverty line. Because these weights come from a 1973?4 survey, food is heavily over weighted for the contemporary poor, and the nominal poverty lines are understated, both because the CPIAL food index is understated, and because too much weight is assigned to food in a period when food prices have been falling relative to nonfood prices. As a result, and ignoring other problems with the counts (doubtful interstate and intersectoral price indexes and the growing discrepancy between surveys and national accounts), the official poverty counts for rural India in 2004-5 are too low; the official headcount ratio of 28.3 percent should be closer to 31 percent; at current rates of rural poverty reduction, this eliminates more than three years of progress. More generally, it is clear that the weights used for price indexes should be updated more frequently than is presently the case, something that could be straightforwardly done using India's regular system of household expenditure surveys.