A BRIEF OVERVIEW OF THE PREVIOUS CLASS (05:03 PM)

CPI- CONSUMER PRICE INDEX (05:05 PM)

• It measures the change in retail prices on a monthly basis. It includes both goods and services. Presently CPI takes into consideration both rural and urban households. 
• It reflects the cost of living of the two categories of the consumers 
• Various types of CPI

• Types of CPI	Base year	Compiled by
  CPI (Industrial Workers, IW) It is designed to measure the changes in the prices of a given basket of products and services used by the Industrial workers	2016	Labor Bureau under the Ministry of Labor and Employment
  CPI (Agricultural Labourers, AL) It is designed to revise minimum wages for agricultural labor in different states	1986-87	Labor Bureau under the Ministry of Labor and Employment
  CPI (Rural Labourers, RL)	1986-87	Labor Bureau under the Ministry of Labor and Employment
  CPI (Rural, Urban, and Combined)	2012	CSO or currently NSO

• CPI Rural, Urban (CPI combined) (05:40 PM)
• It covers 448 in the rural basket and 460 items in the urban baskets.
• The base year used to compute CPI is 2012.
• For inflation targeting RBI and the central government use CPI (Combined) instead of WPI for policy-making based on the recommendations of the Urjit Patel Committee.
• Our headline inflation is based on CPI (Combined)

CPI WEIGHTAGE (05:42 PM)

• Groups	Weightage
  (1) Food and beverages	45.9
  (2) Pan, tobacco, and intoxicants	2.4
  (3) Clothing and footwear	6.5
  (4) Housing	10.1
  (5) Fuel and light	6.8
  (6) Miscellaneous	28.3

• CPI headline = 1 + 2 + 3 + 4 + 5 + 6
• CPI core = 2 + 3 + 4 + 6
• CPI (Refined Core)
• It excludes fuel used in transportation i.e. Petrol from petrol vehicles and Diesel from diesel vehicles. 
• Comparison between Rural and Urban inflation or CPI Rural v/s CPI Urban

• Groups	Rural	Urban
  Food and beverages	54.18	36.29
  Pan, tobacco, and intoxicants	3.26	1.36
  Clothing and footwear	7.36	5.57
  Housing	-	21.67
  Fuel and light	7.94	5.58
  Miscellaneous	27.26	29.53
  Total	100 %	100 %
  Food	47.25	29.62

• Rural-urban inflation gap reduced in 2022-23. 
• Inflation was reduced due to a fall in global food prices. 
• CPI Retail inflation declined in Financial Year 2022 as compared to 2021 due to a fall in food prices
• India meets 60% of its edible oil demand through imports and sunflower oil which makes 15% of our total oil imports is procured mainly from Ukraine and Russia.
• Rise in edible oil prices in 2022 had a direct impact on CPI. 

MEASURES TAKEN BY THE GOVERNMENT IN THE RECENT PAST (05:54 PM)

• A buffer stock of pulses has been maintained for price stabilization. 
• Basic duty on refined and crude palm oil was reduced and a stock limit was imposed to prevent hoarding
• Wheat flour export was regulated along with an export duty of 20%, Rice, brown rice, etc 
• In the recent past, most of the states experienced higher rural inflation than urban inflation.
• The gap between Urban and rural inflation was highest in March 2022 and in the current fiscal, the rural and urban inflation are closely tracking each other.  

CONVERGENCE BETWEEN CPI AND WPI (06:01 PM)

• Due to differences in composition and weights assigned to different commodities in the two indices, there is a gap between CPI and WPI
• 
• Increase in international prices first impacts WPI and Subsequently it is passed on to retail prices with a lag 
• Convergence between CPI and WPI was mainly driven by two factors
• a) Inflation in the services sector as services formed a core component of CPI combined but are not included in WPI
• b) A cooling or reduction of inflation in commodities such as crude oil, aluminum, and cotton led to lower WPI 
• Inflationary expectations will be lower when households and business houses have trust in institutions like RBI i.e. They believe that RBI and government will be successful in handling Inflation in the long run
• Monetary tightening policies of RBI like an increase in the Repo rate and CRR, though affected the money supply, investment, and credit expansion were positive indicating that India's policies related to inflation will lead to a "Soft Landing" i.e. No recession in spite of monetary tightening.
• This situation is quite different from the inflationary situation in the 1970s or 1990s as there was a challenge of "Hard Landing" due to tightening policies in different countries (* Hard Landing means tightening policies leading to recession)

BASIC TERMS (06:14 PM)

• Deflation-
• Deflationary cycles are more dangerous than Inflation. It is a fall in the general price level of goods and services.
• Deflation is usually associated with a significant unemployment problem.
• When inflation becomes negative it leads to deflation and in most of developed countries, deflation is directly associated with recession
• To handle deflation, the government increases its expenditure, reduces the tax rate to boost demand and respective monetary authorities inject liquidity through monetary stimulus policies. Example- Quantitative easing.  
• Disinflation
• It shows the rate of change of inflation over time. 
• In disinflation, inflation is declining but it remains positive. Example- If the inflation rate in India was 7% in March, but reduced to 4% in May. It is said to be experiencing disinflation. 
• 
• Stagflation
• It emerges when both stagnation and inflation occur simultaneously. It is an economic period of no growth, relatively high unemployment, and rise in the prices of goods, and a decline in GDP. 
• Stagflation is a rare phenomenon and is bad for the economy. Example- USA in the 1970s due to an increase in oil prices
• Reflation 
• It is a phenomenon when inflation returns after a spell of deflation thereby indicating that the economy is recovering
• Skewflation 
• It occurs when there is inflation in some commodities and deflation in others. For example- The increase in cost of living with a fall in asset prices. It is neither inflation nor deflation. 
• GDP Deflator 
• It refers to the ratio between GDP at Current prices and GDP at constant prices. 
• 
• If the GDP deflator is 1, it indicates no change in general price levels 
• If the GDP deflator is greater than 1, it indicates an increase in the general price level
• As compared to WPI and CPI, the GDP deflator is more comprehensive in measuring inflation as it takes into account all goods and services of the economy but still it is not used for policy-making as GDP-related data is not available on a monthly basis. 

POVERTY (07:00 PM)

• Framework of the topic
• What is poverty
• Concept of absolute poverty
• Concept of Headcount ratio, Poverty line basket.
• Concept of poverty gap ratio
• Squared poverty gap Index
• Measurement of poverty- Uniform Recall period, Mixed Recall Period, Modified Mixed Recall Period
• Different committees related to poverty
• Poverty V/s Growth
• Government measures (Challenges). 
• Destitute lines

CONCEPT OF POVERTY (07:10 PM)

• It is a deprivation of basic needs that determines the quality of life. It includes food, clothing, shelter, drinking water, etc.
• It also includes deprivation of opportunities for health, education, skill development, employment, etc.
• Absolute poverty
• In this poverty minimum physical quantities like cereals, milk, and pulses are determined for a subsistence level of living, and the price quotations of these commodities are obtained from the market to convert these commodity requirements into monetary terms by aggregating all the quantities included and its money value a figure expressing consumer per capita expenditure is determined.
• The population whose level of income or expenditure is below this level/figure is considered to be BPL.
• It is expressed as no. of poor people as a proportion of the total population, This is also called the headcount ratio.
• [Head count ratio does not measure the intensity of poverty. It only measures the incidence of poverty]
• The reason to determine poverty on the basis of consumption expenditure instead of income is that dependent people like children and senior citizens also consume even though they are not earning. Another reason is even though their income is fewer people may consume more with the backup of assets or borrowing.

POVERTY GAP RATIO (07:40 PM)

• It is the difference between the poverty line and the average actual monthly consumption expenditure of a BPL household, It indicates the average shortfall from the poverty line
• In mathematical terms poverty gap ratio=Poverty line in monetary terms-Average monthly per capita expenditure of a BPL household/Poverty line*100
• Through this measure, the government can derive the per capita amount of transfers required to eliminate poverty, the more the poverty gap more the transfers required to bring BPL households above the poverty line.

SQUARED POVERTY GAP INDEX (07:50 PM)

• Example- Let's take two countries 

• A	B
  HCR= 2/10	HCR= 2/10
  A.1= PCI= 100	B.1= PCI=60
  A.2= PCI= 10	B.2= PCI= 50
  Poverty gap= (100.5-55)/100.5	Poverty gap= (100.5-55)/100.5

• Poverty line is 100.5. The Poverty gap ratio is also the same. 
• But the inequality in case A is more, so in this circumstance, the Squared poverty gap is used. 

• SPGI= { (PL-income of the first)2/ PL + (PL- Income of the second)2/ PL +.........N}/ N

• This method squares the poverty gap for each individual/household i.e. very poor will be allotted higher weightage than those falling only a few cents short of the poverty line. 
• Example: Let's assume two different countries A&B, In A we have 8 people APL and 2 BPL and the same is the case with B also.
• So here HCR=20% in both cases.
• The poverty gap ratio in both cases is 50%.
• In this case through the squared poverty gap index, we can identify the situation is more severe in country A than in country B. It measures the severity or intensity of poverty taking into account inequality among the poor.

The Topic for the next class:- Poverty Estimation in India, Committees for Poverty Estimation.