The plutocratic bias in the Indian consumer price index

AuthorDilip M. NACHANE,Aditi CHAUBAL
Date01 June 2019
DOIhttp://doi.org/10.1111/ilr.12072
Published date01 June 2019
International Labour Review, Vol. 158 (2019), No. 2
Copyright © The authors 2019
Journal compilation © International Labour Organization 2019
The plutocratic bias in the Indian
consumer price index
Dilip M. NACHANE* and Aditi CHAUBAL**
Abstract. Studies have found a plutocratic bias in the traditional Laspeyres-type
consumer price index (CPI), attaching greater importance to expenditure by rich
households compared to the poor, while the democratic CPI attaches equal weight
to all. The authors calculate the democratic index and estimate the plutocratic
bias for the new Indian CPI (launched in 2012), the rural and urban CPIs, and
the CPIs of three Indian states from 2012 to 2015. They further develop demo-
cratic indices for commodity groups and separate indices for three expenditure
brackets. The biases found against less developed states and the poorer sections of
the population have important implications for monetary policy and indexation
of transfer payments.
Index numbers, as measures of the percentage change in the price of a rel-
evant basket of commodities, have been in ofcial use for at least a cen-
tury and a half.1 As a matter of fact, variants of the Laspeyres and Paasche
indices (originally suggested in the 1870s) continue to be used by most na-
tional statistical ofces for a variety of purposes. The most frequently used of-
cial index is the consumer price index (CPI), which purports to measure the
changes in the cost of living by reference to a basket of goods used by a given
group over a specied time period. The CPI is usually a Laspeyres index, or
a close variant thereof, such as the Lowe and Young indices (see ILO et al.,
2004). Ever since Konüs (1939), we have known that the Laspeyres index (as a
measure of the cost of living) suffers from an upward “substitution bias” given
that the xed market basket ignores the substitutions that consumers make in
their purchases in response to relative price changes. The Boskin Commission
report (see United States Congress, 1996 ) – one of the most thorough reviews
* Chancellor, Manipur University, Manipur; Honorary Professor, Indira Gandhi Institute
of Development Research, Mumbai, email: nachane@igidr.ac.in. ** Indian Institute of Technol-
ogy Bombay, Mumbai, email: aditichaubal@iitb.ac.in (corresponding author). The authors would
like to thank two anonymous referees for their valuable comments, which led to considerable
improvement of the article.
Responsibility for opinions expressed in signed articles rests solely with their authors,
and publication does not constitute an endorsement by the ILO.
1 See Chance (1966) for a fascinating history of this topic.
International Labour Review366
of the United States’ CPI – notes various other sources of dissatisfaction with
the Laspeyres–Lowe–Young (LLY) types of CPIs, such as quality-change bias,
outlet substitution bias and new products bias. Additionally, these indices are
not “superlative” (see Diewert, 1976) in that they do not provide an exact re-
ection of the changes in the cost of living over a specic period.2
However, one notable drawback of the LLY-type indices that has at-
tracted relatively little attention is the so-called plutocratic bias that they dis-
play. This bias arises in their very construction, given that they give greater
weight to the more afuent consumption groups, such that the associated CPI
and ination measures overwhelmingly reect the cost of living (and changes
therein) of the upper deciles of the population, rather than the lower deciles.
This bias seems to have rst been brought to the notice of economists by Prais
(1959) and Nicholson (1975). The issues were considerably elaborated on by
Fry and Pashardes (1986), Pollak (1998) and Deaton (1998), among others. Em-
pirical estimates of the “plutocratic gap” have been obtained for several coun-
tries, most notably Spain (Ley, 2005; Izquierdo, Ley and Ruiz-Castillo, 2003),
the United States (Deaton, 1998; Kokoski, 200 0), the United Kingdom (Dea-
ton and Muellbauer, 1980; Fry and Pashardes, 1986) and Hungary (Newbery,
1995).3 The plutocratic bias takes on additional signicance in the wake of the
recent adoption by several central banks of “ination targeting regimes”. In
such situations, monetary policy may exhibit an anti-poor bias under certain
circumstances. Such a bias may also arise in countries where wages, salaries or
social benets are indexed to the CPI.
In this article, we seek to calculate the plutocratic gap for the new Indian
CPI, taking 2012 as the base year for the four years from 2012 to 2015. In our
opinion, this issue assumes particular signicance in the case of India, where
the incidence of poverty is very high, income and consumption inequalities are
signicant and consumption patterns differ widely across income groups and
geographical regions. In such a context, the question “whose ination?” is par-
ticularly poignant, especially since salaries in the organized sector are largely
indexed, while those in the unorganized sector are not, and the Reserve Bank
of India (RBI) is in the process of completing a rapid switchover to an ina-
tion targeting regime (see RBI, 2014).
The remainder of this article is organized into four main sections. The
rst section introduces the concept of the plutocratic gap and its salient fea-
tures. The second section presents the case of India, setting out the relevant
empirical context and the calculation of the plutocratic gap in the new Indian
CPI, both with and without adjustment for household size and for rural and
urban households. The third section provides a detailed analysis in which we
decompose the plutocratic bias in terms of commodities and consider the
regional dimension of the bias by compiling plutocratic biases for the three
2 See Afriat and Milana (2009) for a detailed discussion of exact and superlative index
numbers. Mathematically speaking, a superlative index number can be viewed as a second-order
approximation to a homothetic utility function (see Armknecht and Silver, 2012, p. 4, footnote 3).
3 See Ley (2005, p. 639) for an exhaustive list.

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