Late last month, the Indian government made two significant announcements. On October 28, the Union Cabinet approved the terms of reference for the 8th Central Pay Commission (CPC), giving it 18 months to deliver its recommendations. This was followed by the Statistics Ministry’s release of a discussion paper seeking public feedback on proposed changes to how housing inflation is calculated, part of an effort to revamp the Consumer Price Index (CPI).
While these issues may seem unrelated, the revision of pay and pensions for Central government employees and retail inflation components could be interconnected. The recommendations of the 8th CPC have the potential to drastically alter India’s headline inflation figure, particularly in light of the proposed changes from the Ministry of Statistics and Programme Implementation (MoSPI).
To assess housing inflation, which constitutes 10.07% of the current CPI basket, the Statistics Ministry surveys over 13,000 households in more than 300 towns. More than one-eighth of these residences are provided to employees by the Central and state governments, along with public sector undertakings (PSUs). The challenge arises because MoSPI uses the House Rent Allowance (HRA) that residents forgo, in conjunction with a nominal license fee, as a proxy for rent to determine housing inflation.
The problem with this method is that HRA is not influenced by market demand and supply but by the individual occupying the residence. If a government employee vacates a surveyed home and is succeeded by a less senior colleague, the HRA decreases. This change can lead to a misleading decline in reported inflation, even though nothing else has shifted, aside from the tenant. Furthermore, modifications to HRA become evident when government salaries are adjusted, as the 8th CPC is expected to do. Such adjustments can confuse both policymakers and investors, reminiscent of similar circumstances eight years ago.
In June 2017, housing inflation and overall CPI inflation were reported at 4.7% and a record low of 1.46%, respectively. However, starting in July 2017, the recommendations of the 7th CPC, which included a 105.6% increase in HRA for Central government employees, took effect. By June 2018, housing inflation soared to 8.45%, and overall CPI inflation hit 4.92%. This sharp rise stemmed from an administrative decision rather than actual market changes, forcing the Reserve Bank of India (RBI) to overlook the surge in inflation.
It took until mid-2019 for housing inflation to drop back below 5%. Since then, it has remained under 4%, a figure that deviates from reality. In the six quarters beginning January 2024, average CPI housing inflation has been around 3%, while home prices, according to the RBI’s quarterly House Price Index, have risen by 6%. Additionally, rental indices from property firm MagicBricks have shown an average increase of 20% each quarter.
To resolve these discrepancies, MoSPI has proposed significant changes to how housing inflation is calculated for the upcoming CPI series set to debut in February. Notably, government housing and employer-provided homes will be excluded from calculations. Rent data collection will switch from a semi-annual to a monthly basis, and housing inflation metrics will now also reflect conditions in rural areas. According to Nomura economists, with the 8th CPC poised to submit its recommendations in the next 18 months, the revamped composition of the housing CPI will provide a more accurate reflection of real rental inflation. While higher housing inflation may be anticipated this time, it will be due to data that more closely represents actual market conditions.
Original Source: https://indianexpress.com/article/explained/explained-economics/why-8th-central-pay-commission-needs-better-inflation-measurement-10350600/
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Publish Date: 2025-11-07 04:57:00
