Malfunctioning barometer

Tags: News

It influences RBI’s money policy, government programmes and dearness allowances for you and me; yet the index that tracks monster inflation is quite a bit of a misnomer. Here’s how...

Mumbai housewife Sangita Shinde sought work in a shopping mall last year to help pay her children’s soaring school fees. But don’t expect to find that jump in living costs reflected in India’s inflation data.

“I was forced to take up a job,” said Shinde, 35, as she oversaw cleaning at a retail complex in India’s financial centre. “It’s so difficult to meet rising expenses.”

What Shinde and millions of others have to cope with every day is hidden from investors and central bank governor Duvvuri Subbarao when it comes to gauging India’s economy, because official data are often incomplete or months out of date. The statistical fog spurred the central bank to collect its own price data to supplement the benchmark wholesale-price index, which excludes services, including education, that make up 57 per cent of gross domestic product.

“To a large extent, the Reserve Bank of India is essentially making decisions in the dark,” said Jahangir Aziz, India chief economist at JP Morgan Chase in Washington and a former adviser at the nation’s finance ministry. “There is no doubt about it that India lacks a solid, good measure of inflation. There has to be much broader coverage of services.”

What Subbarao can deduce about price pressures left him holding off on lowering the benchmark interest rate earlier this week and opting to reduce lenders’ reserve requirements instead. He said at a press briefing in Mumbai that the central bank must not lose sight of its inflation goals, adding the “stickiness” of price increases is a main concern.

While Shinde says school fees have doubled in the past five years, the wholesale index shows inflation in Asia’s third-biggest economy averaged 7.3 per cent since September 2007. The gauge conflates retail and producer prices, and fails to reflect services, Subbarao said on July 17. In contrast, eco­nomies from Indonesia to the European Union and the US include services such as education in inflation measures.

The Reserve Bank of India now collects prices for items such as foodgrains and lentils to capture variations across the country, it said last month. Labour-market data are also patchy — the most recent jobless estimate is at least four months old. The reliability of the official 3.8 per cent unemployment-rate estimate is clouded by being based on a sample of about 0.05 per cent of Indian households.

“It’s almost unthinkable for the central bank to make policies without knowing unemployment,” said Aziz, who previously worked at the International Monetary Fund. “If I don’t even know the demand side of the economy, how can I do demand management?”

Less than a year after becoming governor in September 2008, Subbarao said that while “most economies have to contend with an uncertain future, here, in India, we are having to contend with an uncertain past as well,” he said citing more frequent data revisions than elsewhere.

Subbarao’s point was underscored this year with an inflation report that might have affected the Reserve Bank of India’s April 17 decision to lower interest rates for the first time since 2009. The half-percentage-point cut in the benchmark repurchase rate came a day after a release showing wholesale-price inflation had eased to 6.89 per cent in March, signalling more scope for monetary stimulus.

Weeks later, revisions showed inflation had accelerated to 7.69 per cent that month, the second-fastest for the year so far, pulling away from Subbarao’s comfort level of about five per cent and casting doubt on the judgement to reduce borrowing costs.

While peers in the Group of 20 major economies rely on consumer inflation as their main gauge, India only began publishing a comprehensive, year-on-year measure of such prices in February.

The Reserve Bank of India under Subbarao has stepped up efforts to fill information gaps. Aside from gathering its own price data, the bank started a consumer confidence survey in 2010 and introduced a house-price index for Mumbai, the financial capital, in 2009, that was later extended to eight more cities.

It also surveys inflation expectations and compiles a composite leading indicator for the economy.

India isn’t alone in suffering data failings. In China, vice-premier Li Keqiang, then a regional Communist Party head, said in 2007 that the figures going into the country’s GDP are “man-made” and “for reference only,” according to a diplomatic cable published by Wikileaks in 2010.

The deficiencies in India are worse than a number of regional peers, said Rahul Bajoria, an economist at Barclays in Singapore. “India’s data do fall short on many benchmarks as compared with other nations in the region,” he said. “If you are not able to take the data completely at the face value, you have to be ready that you may make some mistakes.”

While the new consumer-price gauge is a step in the right direction, its limited history makes it unsuitable as a sole headline measure of inflation, Subbarao said in July.

For Shinde and other consumers, sacrifices are needed to cope with the increasing cost of living. Since July, she’s stopped taking taxis to work, and now joins millions of commuters taking Mumbai’s packed trains into the city, jostling in carriages so crowded that passengers cling to the roofs and hang out of doorways.

“With rising school fees, transportation costs and house rent, life is becoming quite a struggle,” she said.


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