Housing Index Revamp: Rural Rentals to Replace Employer Housing

The Ministry of Statistics and Programme Implementation (MoSPI) announced significant changes to the housing index within the Consumer Price Index (CPI). The revisions aim to incorporate rural rental data while excluding employer-provided accommodations, which do not accurately reflect market transactions. This decision was outlined in a discussion paper released on September 28, 2023.

Currently, the housing index only accounts for urban areas due to a lack of imputed rent data for rural regions from the 2011-12 Household Consumption Expenditure Survey (HCES). The MoSPI is set to revise the CPI base year to 2024 from 2012, aligning item weights with the upcoming 2023-24 HCES. The ministry’s proposal includes a shift to monthly rent data collection, compared to the previous six-month interval. In urban markets, data will be gathered from 12 dwellings per market, while six will be sampled in rural settings, with dwelling type weights based on Census 2011.

Methodological Enhancements for Housing Data

These proposed changes are designed to enhance the robustness and representativeness of the housing index. Currently, housing constitutes an expenditure share of 10.07% at the national level and 21.67% in urban areas. Recent data indicated that housing inflation rose to 3.98% in September 2023, a jump from 3.09% in August 2023. Overall, India’s retail inflation eased to 1.5% from 2.1% during the same timeframe.

Experts have identified several limitations in the existing methodology. The use of three different calculation methods has been linked to abrupt spikes in inflation rates since May 2013. Additionally, the reliance on six-month-old data has resulted in unexplained fluctuations in monthly housing inflation rates since December 2013. The discussion paper noted recommendations from experts at the International Monetary Fund (IMF) to adopt a one-month change approach for better accuracy.

Impact of Employer-Provided Housing on Rent Estimates

The report also highlighted the distorting effects of employer-provided housing on rent estimates. This type of accommodation has been found to negatively influence the accuracy of rent calculations, since changes in salary-related housing rent allowance (HRA) do not necessarily reflect actual market rents. The Reserve Bank of India and other users have raised concerns about these distortions, emphasizing the need for a more accurate representation of market conditions in the housing index.

As the MoSPI moves forward with these changes, the aim is clear: to create a more comprehensive and reliable housing index that reflects the true state of rental markets across both urban and rural areas.