09:24 June 19, 2012
RBI Chief Mr. Subbarao’s concern over India’s macroeconomic data is a welcome acknowledgment of a recurring national problem that urgently merits a major rationalization in the computation of our so-called key economic indicators, a set of numbers and indices that affect the sentiments of the investment community, year after year.
The RBI chief has openly admitted that sharp revisions in macroeconomic data, including growth and inflation figures, often disrupt policy calculations. Off mark provisional numbers have become quite a mockery in the context of policy estimates. The most glaring instance of sharp revisions is the Wholesale Price Index (WPI) but the Index of Industrial Production (IIP) is not far behind in the honors.
As Mr. Subbarao has himself cited, the Feb 2010 IIP number was 6.8 percent whereas the economy grew at a much faster pace. In sharp contrast, the last year’s inflation projections were found nowhere the actual outcomes.
It’s high time the government sets about correcting the scores of anomalies that creep into the calculations. Take the case of IIP. Every year, majority of investors lose sleep or rejoice depending on the low or high number without probing deep into the sanctity of these calculations. What is IIP after all? It’s an index of industrial production, a number denoting the health of industrial production during a certain period with reference to past figures. As an indicator, it prima facie looks credible but when you look at the manner in which it is arrived at, the doubts become too prominent for comfort.
The data is collated from 15 different agencies which makes the collection process tedious. This results in “guesstimates” and provisional data based on inadequate data, which in turn construct a provisional index. The discrepancy hurts as soon as the actual data becomes available and thus begins a litany of revisions. Precisely why we hear the government parrot phrases like “higher-than-expected” global oil & commodity price gains, “lower than expected” decline in food prices or “larger than usual” upward revision to inflation data.
Talking of the IIP, even a cursory glance at the figures makes the dismal scene evident. The March IIP number was revised to 7.8 percent in June from 7.3 percent, while December IIP was upwardly revised to 2.5 percent from an initial reading of 1.6 percent. The government recently changed the base year of the IIP data calculation
to 2004-05 from the old base of 1993-94 but even the updated base suffers from volatility, if not anomaly.
For the Central bank, this “provisional game” means an awkward choice between either guessing the revision amount while taking a policy response or revisiting policy response after actual outcomes. Either way, the embarrassment is the same.
The RBI chief’s official concern should steer the government towards positive action, we presume. Hope this reasonable public expectation does not end up in a poor “guesstimate”.