Recent data releases — the Index of Industrial Production (IIP) for December, 2014; Consumer Price Index (CPI); and Wholesale Price Index (WPI) for January - can hardly be called routine. The IIP, which measures the industrial output, was up by 1.7 per cent on a year-on-year basis, down from 3.9 per cent in November, while CPI inflation increased to 5.11 per cent in January. Inflation based on the WPI contracted by 0.4 per cent, pushing it into negative territory. In the corresponding period last year, it had increased by 5.1 per cent. The IIP and CPI data were released on February 12 and the WPI data a few days later.
Earlier on February 9, the Central Statistics Office sprang the biggest surprise in recent times. In its advance estimate of GDP growth for the current year (2014-15), the economy grew at an astounding 7.4 per cent. This showed the economy to be in the pink of health compared to most other major economies. All earlier estimates, nowhere near the revised figures, as well as the numerous prescriptions for reviving the economy will have to thrown overboard if the new CSO figures pass muster with experts. It must be stated that the initial reactions to the new national income figures are one of scepticism. The official data machinery has quite a job on its hands.
The purpose of this article is, however, not to join the sceptics but to study the implications of the revision on the other data releases, especially the one relating to industrial output and retail inflation.
Monetary policy actions such as whether there should be a rate cut or not are based on an interpretation of these data. As has been noticed several times in the past, these can give contradictory signals. Inflation might be seen to be high based on these data. The Reserve Bank of India may be induced to hold or even increase the rates but the industrial output figures call for a cheaper interest rate policy. This dilemma has played out on several occasions and yet there is still no conclusive evidence that policy can be framed based entirely on these sets of figures, either individually or together. Fathoming the overall growth trajectory is hardly likely to be easy in the face of contradictory lead indicators.
This time there is the additional major complication. Obviously, the unexpectedly robust growth data for the current year can confuse rather than enlighten the interpretation of the most recent data on inflation and industrial output. The data releases have come immediately after major revisions in the way the country’s gross domestic product (GDP) is calculated. The base year for calculating it has also been changed and the matrix for calculation changed from factor cost to market prices.
CPI index
The CPI index has also undergone a major change as well with the base year being shifted from 2010 to 2012. Along with this, the weightage given to various items forming the index has been modified on the basis of the expenditure survey for 2011-12. Until December, the survey for 2004-05 was the reference point for estimating the weights.
The fall of WPI inflation into negative territory is big news. It indicates the continuance of disinflationary pressures, and may pave the way for a rate cut. However, it is the CPI inflation that is the reference point for monetary policy today. The new base year for CPI and the reshuffling of weights will be analysed carefully for what they portend.
Not to be forgotten behind the declines in inflation of both categories are the falling commodity prices, especially of petroleum. In a sharp reminder that global oil prices will not continue to move downwards indefinitely, there was a sharp reversal a fortnight ago. However the declining trend has since resumed.
In India, domestic gasoline prices were hiked after many continuous cuts. The budget will consider all aspects of petroleum pricing at the retail level. The government has levied indirect taxes on petroleum, which, however, were not passed on to the customers.
Turning to the national income statistics, it is evident that there are two sets of hurdles that the official statisticians will have to overcome. First, there is the question of establishing the credibility of official statistics. Even in the past, some of the figures, for example, the industrial output figure, have been faulted for being inconsistent and erratic. Second, the new estimates have very little relevance to the ground. Important indicators, including the IIP, bank credit disbursements, and corporate performance do not bear out the strong growth figures estimated.
For important users of the data, including the government and the RBI, the key tasks would be to ‘reconcile’ the new estimates with previous figures. For this, as many economists have been saying, the CSO should provide a lot more supporting data. Lay people would be better off if the official statistics are seen to make an impact on their day-to-day life.
(This article first appeared in The Hindu dated Feb 23, 2015)