The Hidden Weights, Why India’s New CPI Must Better Account for Health Costs, Medical Inflation, and the Burden of Remittances
The revision of the Consumer Price Index (CPI) is a welcome and necessary step. As Anoushka Sawhney argued in her ET Explainer, making the index more contemporaneous—reflecting current consumption patterns rather than those of a decade ago—is essential for accurate measurement of inflation and for informed policymaking. The new CPI, with its 2024 base year and weights derived from the Household Consumption Expenditure Survey 2023-24, represents a significant improvement over the outdated 2012 series.
But as the accompanying letter to the editor by Manas R Das points out, the revision may have missed some critical elements. The weight assigned to ‘health’ could have been more, especially for urban areas where the increasing corporatisation of hospitals has raised medical costs unbearably. The medical cost burden will only worsen if the cost of health insurance—with its increasing penetration—is factored in. Furthermore, with the increased financialisation of the economy, remittances have ballooned, as have the costs associated with sending money, particularly for domestic and international migrants. It is unclear whether these costs find a place in the new CPI.
The letter raises questions that go to the heart of what an inflation index should measure and whose experience it should represent. If the CPI underweights health, it will underestimate the inflation experienced by those who are most affected by rising medical costs. If it ignores remittance costs, it will miss a significant and growing component of household expenditure for millions of migrant workers. These are not minor oversights; they are potentially significant distortions in our understanding of the cost of living.
The Health Weight: Why Urban India Needs More
The corporatisation of healthcare in India’s cities has transformed the medical landscape. Private hospital chains have expanded rapidly, offering advanced treatments and modern facilities—but at a price that puts them out of reach for many. The cost of a routine consultation, a diagnostic test, or a surgical procedure has risen far faster than general inflation. Health insurance premiums have followed suit, eating into household budgets.
The new CPI has reduced the weight of food and beverages from 45.86 per cent to 36.75 per cent, reflecting the reality that as households become more prosperous, they spend a smaller share of their income on food. But the weight assigned to health, the letter argues, could have been higher. In urban areas, where medical costs are highest and where households rely more on private healthcare, this underweighting is particularly problematic.
Consider the experience of a typical urban middle-class family. A hospitalisation for a major illness can wipe out years of savings. Even routine expenses—doctor visits, medications, diagnostics—add up to a significant monthly outlay. Health insurance provides some protection, but premiums are rising, and co-payments and deductibles mean that out-of-pocket expenses remain substantial. If the CPI does not adequately capture these costs, it will understate the true inflation burden on urban households.
The Insurance Factor: A Growing Component of Household Expenditure
Health insurance penetration in India is increasing, driven by greater awareness, rising incomes, and government schemes. For many households, insurance premiums are now a significant and non-negotiable monthly expense. Yet the CPI’s treatment of insurance is complex. Premiums are not directly included in the index; instead, the cost of insurance is implicitly captured through the prices of the medical services that insurance covers. This approach assumes that the relationship between premiums and service costs is stable, an assumption that may not hold in a rapidly changing market.
If insurance premiums are rising faster than medical costs—if insurers are increasing their margins or if adverse selection is driving up rates—then households are experiencing inflation that the CPI may miss. The letter’s concern about factoring in the cost of health insurance is therefore well-founded. A comprehensive measure of inflation should capture all the costs that households bear, including the cost of insuring against future medical expenses.
The Remittance Question: A Missing Component
The letter’s second major concern is about remittance costs. With the increased financialisation of the economy, remittances have ballooned. Millions of Indians work outside their home states or countries, sending money back to their families. The cost of sending this money—transfer fees, exchange rate margins, and other charges—is a real and often significant household expense.
Do these costs find a place in the new CPI? The letter’s uncertainty reflects a broader lack of transparency about what the index includes and excludes. Remittance costs are not a consumption item in the traditional sense; they are a cost associated with transferring income rather than purchasing goods and services. But for migrant households, they are an unavoidable expense that reduces disposable income and affects living standards. If the CPI is meant to measure the cost of living, it should arguably account for these costs.
The issue is not merely technical; it is political. Migrant workers are among the most vulnerable members of society. They send money home to support families who often live in areas with higher poverty rates and poorer access to services. The cost of remittances eats into the meagre sums they are able to send. If the CPI understates their true cost of living, it may lead to policies that fail to address their needs.
The Urban-Rural Divide: Different Consumption Patterns, Different Inflation Experiences
The letter’s focus on urban areas highlights a broader issue with the CPI: the consumption patterns of urban and rural households are different, and they are changing at different rates. Urban households spend more on health, education, transport, and recreation; rural households spend more on food and fuel. A single national CPI cannot capture these differences, which is why many countries produce separate indices for urban and rural areas.
India does produce separate indices, but the weights and methodologies are the same. The letter’s concern about health costs in urban areas suggests that even within the urban index, the health weight may be too low. This is not merely an academic quibble; it has real consequences for policy. The Reserve Bank of India uses the CPI to set interest rates. If the index understates urban inflation, monetary policy may be too loose, allowing inflation to persist. If it overstates rural inflation, policy may be too tight, suppressing growth.
Conclusion: The Devil in the Details
The revision of the CPI is a significant achievement, but the devil is in the details. The letter by Manas R Das reminds us that even well-intentioned reforms can miss important elements. The weight assigned to health, especially in urban areas, may be too low. The treatment of health insurance is complex and may not fully capture rising costs. And remittance costs, a significant expense for millions of migrant households, may be entirely excluded.
These are not minor quibbles; they are fundamental questions about what the CPI measures and whose experience it represents. If the index is to be a true measure of the cost of living, it must reflect the costs that real households actually bear. That means giving adequate weight to health, properly accounting for insurance, and considering whether remittance costs should be included.
The government and the Ministry of Statistics and Programme Implementation (MoSPI) should take these concerns seriously. They should review the health weight, especially in the urban index, and consider whether it adequately reflects the reality of rising medical costs. They should examine the treatment of health insurance and explore ways to capture its impact on household budgets. And they should study the feasibility of including remittance costs in the index, perhaps through a separate supplementary measure.
The CPI is too important to be left to the statisticians alone. It affects monetary policy, fiscal planning, wage negotiations, and the welfare of millions. It must be as accurate and representative as possible. The letter’s concerns deserve a response.
Q&A Section
Q1: What is the primary concern raised by Manas R Das regarding the weight assigned to ‘health’ in the new CPI?
A1: The primary concern is that the weight assigned to ‘health’ could have been more, especially for urban areas where the increasing corporatisation of hospitals has raised medical costs unbearably. Urban households rely more on private healthcare and face higher medical expenses than their rural counterparts. If the CPI underweights health, it will underestimate the inflation experienced by these households. The new CPI has reduced the weight of food and beverages to reflect changing consumption patterns, but the letter argues that a corresponding increase in the health weight may not have gone far enough. This is not merely a technical issue; it has real consequences for how inflation is measured and how policies are designed.
Q2: How does the increasing penetration of health insurance complicate the measurement of medical inflation in the CPI?
A2: Health insurance premiums are a significant and growing household expense, but the CPI’s treatment of insurance is complex. Premiums are not directly included in the index; instead, the cost of insurance is implicitly captured through the prices of the medical services that insurance covers. This approach assumes that the relationship between premiums and service costs is stable. However, if insurance premiums are rising faster than medical costs—due to insurer margins, adverse selection, or other factors—then households are experiencing inflation that the CPI may miss. The letter expresses concern that this could lead to an understatement of the true inflation burden, particularly for households that rely heavily on insurance to manage healthcare costs.
Q3: Why does the letter raise questions about remittance costs, and why might these be significant for certain households?
A3: With the increased financialisation of the economy, remittances have ballooned. Millions of Indians work outside their home states or countries, sending money back to their families. The cost of sending this money—transfer fees, exchange rate margins, and other charges—is a real and often significant household expense. The letter questions whether these costs find a place in the new CPI. Remittance costs are not a consumption item in the traditional sense, but for migrant households, they are an unavoidable expense that reduces disposable income and affects living standards. If the CPI excludes these costs, it may understate the true cost of living for these vulnerable populations. The letter calls for greater transparency about what the index includes and excludes.
Q4: How might the underweighting of health costs in the CPI affect policy decisions?
A4: The CPI is used by the Reserve Bank of India to set interest rates and by the government for fiscal planning, wage negotiations, and inflation-indexed benefits. If the index understates urban health inflation, monetary policy may be too loose, allowing inflation to persist. Fiscal allocations for health-related programmes may be inadequate. Wage adjustments for urban workers may not fully compensate for rising medical costs. Inflation-indexed benefits for pensioners and others may fall short of their actual needs. In short, an inaccurate CPI leads to suboptimal policy decisions that can have real and adverse effects on people’s lives. The letter’s concern is not merely academic; it is about ensuring that the tools we use to measure the economy are fit for purpose.
Q5: What recommendations does the letter implicitly make for improving the CPI?
A5: The letter implicitly makes several recommendations. First, review the health weight, especially in the urban index, to ensure it adequately reflects the reality of rising medical costs. Second, examine the treatment of health insurance and explore ways to capture its impact on household budgets, perhaps by directly including premiums or by developing a supplementary measure. Third, study the feasibility of including remittance costs in the index, or at least publishing a separate supplementary index that tracks these costs. Fourth, increase transparency about what the CPI includes and excludes, so that users can understand its limitations and interpret its movements correctly. The letter does not call for abandoning the CPI revision, but for refining it to ensure it is as accurate and representative as possible. These are reasonable recommendations that deserve serious consideration by the Ministry of Statistics and Programme Implementation.
