2022-23 as Base Year: A Structural Analysis.....

The Government of India’s decision to revise the base year for GDP, Index of Industrial Production (IIP), and Consumer Price Index (CPI) to 2022-23 has drawn scrutiny, particularly regarding the use of 2022-23 as a base year for inflationary metrics. Since the implementation of the Flexible Inflation Targeting (FIT) framework in 2016, the Reserve Bank of India (RBI) is mandated to maintain headline CPI inflation at 4% with a tolerance band of +/- 2%. A "normal" base year for inflation should ideally reflect price stability near this 4% target. However, choosing a year where inflation was near the 6% upper limit, driven by global supply shocks, raises questions about the legitimacy of this base year for long-term comparative analysis.

The Problem with 2022-23 as a Base Year

The fiscal year 2022-23 saw retail inflation elevated, averaging 6.7 per cent, driven largely by post-pandemic recovery, supply chain disruptions, and the impact of the Russia-Ukraine war.

Deviation from Target: The 6.7% average in 2022-23 represents a period of high inflation, not a "normal price-level" scenario. Using this as a base means subsequent years, even if inflation falls to 4% or 5%, will appear artificially low or stable, masking underlying price pressure.

Abnormal Economic Context: As noted in economic studies, a base year should not be a period of significant shocks, such as the immediate post-pandemic period. The 2022-23 period was characterized by elevated fuel and food prices—a "supply shock" rather than a sustainable economic equilibrium.

Alternative Years: Compared to 2022-23, years like 2017-18 and 2018-19 (with CPI at 3.6% and 3.4% respectively) or even 2019-20 (5.8%) would have provided a more stable base closer to the 4% target.

Rationale for Choosing 2022-23

Despite the high inflation, the government chose 2022-23 to update the base year from 2011-12 to align with "newNormal" economic trends.

Reflecting Structural Changes: The primary reason is that the 2011-12 base year was outdated and did not capture the post-COVID economy, which saw a rapid increase in digital services, formalization of the economy, and changes in consumer consumption patterns.

Post-Pandemic Consumption Pattern: The 2022-23 Household Consumption Expenditure Survey (HCES) revealed new, updated spending habits.

International Standards: Regularly updating to a recent year helps maintain compatibility with global best practices, even if the year itself was not entirely stable.

Structural Differences in Inflation: 2017-19 vs. 2022-23

The inflation experienced in 2017-19 was structurally different from that in 2022-23, requiring different policy responses.

2017-19 (Slowdown and Services Inflation): In 2018-19, inflation was driven primarily by services, while goods inflation was quite low at 2.6 per cent. Inflation was relatively low, closer to the 4% target, allowing for a neutral monetary policy stance.

2022-23 (Supply Side & Global Shock): The 2022-23 inflation was dominated by "supply-side pressures" in essential commodities (fuel and food). High prices for goods like Wheat (due to a heatwave and crop shortfall) and Sunflower Oil (due to the Ukraine conflict) drove the 6.7% rate.

Examples of Differences:

Food Inflation Structure: 2017-19 saw moderated food prices following good monsoon years. In contrast, 2022-23 saw a sharp spike in pulses and wheat, with food inflation being high (often crossing 7-8%), driven by structural supply chain issues, not high demand.

Fuel Pass-Through: In 2022-23, the surge in global crude oil prices was partly mitigated by government tax cuts, keeping domestic fuel inflation from hitting even higher levels, whereas in 2017-19, oil prices were moderate.

Using 2022-23 as a base year for inflation is arguably flawed from a "normal price level" perspective, as it was a period of high inflation near the upper limit of the target band. The decision to use this year seems to be driven by the need to capture updated, post-pandemic consumption patterns and digital trends, rather than a desire to represent a "stable" price base. While it improves the structural accuracy of the consumption basket, it risks creating a "high base effect," making future inflation figures look deceptively moderate compared to the 2022-23 peak, thus misrepresenting true inflationary pressure compared to the 4% target.