Comparing Cost of Living in Delhi, Mumbai, Chennai, and Bangalore: How Do You Calculate It?

Hi all,

Can anybody help me out to calculate the cost of living index for comparison between important cities in India (Delhi, Mumbai, Chennai & Bangalore)?

Regards,
Preeti

Hi Preeti,

Hope this is useful to you.

Definition:

A Cost Of Living Index (COLI) is a price index that measures the relative cost of living over time. It is an index that measures differences in the price of goods and services.

A COLI measures changes over time in the amount that consumers need to spend to reach a certain level or standard of living. COLI is typically a number, where the Base Index is 100.

A Consumer Price Index (CPI), on the other hand, is a measure of the average change over time in the prices paid by consumers. CPI is typically a percentage change compared to the previous period. An increase in CPI is called inflation, while a decrease is called deflation. Both the COLI and the CPI use a market basket of consumer goods and services.

A COLI is also used to measure the price of the same quantities and types of goods and services in different geographic locations. The COLI used in this way shows the difference in living costs between different locations.

An international COLI measures the differences in the local currency price of the same quantities and types of goods and services in different countries converted to a single currency. This shows the difference in relative living costs between international cities. The cost of living difference between locations indicates the amount that consumers need to spend to maintain a certain level or standard of living.

Among other uses, COLIs are used by organizations and individuals in the calculation of expatriate salary and cost of living allowances to ensure consistent salary purchasing power between the home and host country.

Next, we will discuss how to calculate a COLI between 2 locations applicable to expatriate employees.

Methodology:

For consistency, the goods and services are grouped into similar/related basket groups.

For accuracy, the exact quantity and type of each of the goods and services within each basket are defined. Using these definitions, the prices of the same quantities and types of goods and services in each geographic location are obtained from at least 3 different suppliers representative of those that would typically be used by expatriates.

When calculating the cost of living between 2 locations, the difference in the aggregate cost of all the selected basket groups is examined in each location using the average reported price in each location for the same quantity of each item. The basket groups are weighted according to Expatriate expenditure norms.

For example, the following 13 basket groups have the following weighting, which represents expatriate expenditure norms (the 13 basket groups do not count equally):

• Alcohol & Tobacco (Weight 2.0%)
• Clothing (Weight 2.5%)
• Communication (Weight 2.0%)
• Education (Weight 5.0%)
• Furniture & Appliances (Weight 5.0%)
• Groceries (Weight 16.5%)
• Healthcare (Weight 5.0%)
• Household (Weight 30.0%)
• Miscellaneous (Weight 3.0%)
• Personal Care (Weight 3.0%)
• Recreation and Culture (Weight 6.0%)
• Restaurants, Meals Out, and Hotels (Weight 2.0%)
• Transport (Weight 18.0%)

Prices for the defined quantities and types of goods and services in each location per basket are gathered on a quarterly basis, and the resulting index is updated for each of the above baskets. These indexes are then used to calculate the COLI between any 2 locations. The COLI is the relative differential in the local cost of the basket groups and the ruling exchange rate between the 2 selected locations.

When comparing the cost of living between different locations, the objective is to calculate the difference in the cost of living expressed as an index using one of the locations as the Base. Typically, the home location is referred to as the Base Location (Index = 100).

Practical Example:

Take, for example, a company headquartered in Location A with overseas operations in Location B and C. They send employees on 2 to 3-year assignments from time to time to Location B and C and need a set of COLIs using Location A as the Base City to calculate assignment salary and cost of living allowances.

In our example, Location A has an index of 92, Location B has an index of 129, and Location C has an index of 75.

Using our example, you want to know what the COLI is for Location B and C using Location A as the Base Location:

• Location A COLI = (Location A / Location A) X 100 = (92 / 92) X 100 = 100
• Location B COLI = (Location B / Location A) X 100 = (129 / 92) X 100 = 140.2
• Location C COLI = (Location C / Location A) X 100 = (75 / 92) X 100 = 81.5

The COLI indicates the difference in the cost of living between the locations. In the above example, the COLI of 140.2 means that Location B is 1.402 times more expensive than Location A. In this example, the COLI is positive (higher). This would mean that a person who moves from Location A to Location B would need to earn 40.2% more to have the same standard of living in Location B as they have currently in Location A.

Location C, on the other hand, has a COLI of 81.5. This means that Location C is 0.815 times less expensive than Location A. In this example, the COLI is negative (lower). This would mean that a person who moves from Location A to Location C could earn 18.5% less and have the same standard of living in Location C as they have currently in Location A.

Applying a cost of living index to a salary calculation:

The COLI values are useful in calculating an appropriate salary in another location. A calculator such as a Salary Purchasing Power Parity Calculator (SPPP) calculates an appropriate salary using the COLI, exchange rate, and hardship difference.

The salary used in the calculator is gross or net salary. We advise using a net (after-tax) salary. This will result in a net salary result in the new location, which would then be grossed up for tax and any other statutory deductions in the new location. The calculator will then apply the following formula based on the selections in the calculator:

Salary X Cost of living Index Differential X Exchange Rate X Hardship Differential = Calculated Salary in the new location

Applying the formula to our earlier example with a salary of $100,000 in Location A, sent on assignment to Location B, with an increase in hardship of 10% and paid in US Dollars:

• Location B COLI = 140.2
• Location C COLI = 81.5

Salary Calculation = $100,000 X 1.402 X 1 X 1.1 = $154,220

This means that an employee earning a salary of $100,000 in Location A requires a salary of $154,220 in Location B to compensate for a 40.2% higher cost of living and a 10% higher level of hardship.

Thank you, Kiranji, for your detailed narration on COLI. However, the statement that inflation is based on the Consumer Price Index is not entirely correct in India. Here, it is directly linked to the Wholesale Price Index (WPI). In most other countries, CPI and WPI are the same, and I believe this may have led you to this concept. Concerning WPI, the price variation of all commodities in the market will be taken into account. However, for AICPI, there are some differences and limitations.

There is a specific Consumer, namely the Industrial Worker. Some specified goods and services are defined as the "basket of goods." Along with the price variation of commodities, the consumable quantity will also be considered. Throughout India, 78 Centers are selected to calculate the average.

Based on the All India Consumer Price, Industrial DA is being paid with variables in quarters commencing from January, April, July, and October. For January, the AICPI will be the average of the previous September, October, and November. Similarly, for April, it will be December, January, and February. For July, it will be March, April, and May, and for October, it will be June, July, and August respectively.

When the money devaluation is fully compensated, it is called full DA neutralization. The formula for full DA neutralization is (Total points - Base points) / Base points (in percentage). The AICPI was introduced in India in 1960 and revised in 1982 and 2001. By multiplying the AICPI of 2001 by 4.63, we get the AICPI of 1982, and by multiplying the AICPI of 1982 by 4.93, we get the AICPI of 1960. For DA calculation, the AICPI of 1960 is accepted as the base.

In India, there are mainly two wage settlement terms in existence: Wage Settlements of 1.1.1997 and 1.1.2007. The base points are 1708 on 1.1.1997 and 2884 on 1.1.2007.

I will provide an example, the calculation of AICPI for July '10. This is equivalent to the average of the previous March, April, and May, which are recorded as 170, 170, and 172 (Base year 2001). Multiply by 4.63 and round, we get 787, 787, and 796 (Base year 1982). Multiply by 4.93 and round, we get 3880, 3880, and 3924 (Base year 1960). Finding the average of these 3 and rounding, we get 3895.

For the 1.1.97 scale DA, the total points are 3895, base points are 1708, and the difference is 2187. The percentage is 2187/1708 x 100 = 128.0 (correct to one decimal).

For the 1.1.2007 scale DA, the total points are 3895, base points are 2884, and the difference is 1011. The percentage is 1011/2884 x 100 = 35.1 (correct to one decimal).

I will insert an Excel sheet for IDA calculation effective from 1.10.2008. You may extend the rows further as necessary and enter the 3 indexes towards the year 2001 in green color columns. The results will appear in yellow, and red is used for static information.

With regards,

ABBAS.P.S,

Secretary,

ITI Employees' Association,

ITI Limited, PALAKKAD - 678 623,

KERALA, INDIA.

+91 9447 467 667

AICPI (base 2001) can be found on the following site: [Labour Statistics Page 2](http://labourbureau.nic.in/indexes.htm)

Interesting to note the methodology of calculating and applying COLI. Does anybody have access to survey details that compare the COLI of different cities in India? I would like to get hold of the same to benchmark for a non-metro city like Calicut/Kozhikode.

Best regards,
Jaikish