Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Concepts & Tutorials

RBI Laments Indian Data Suckage

The RBI governor, D Subbarao, speaks in the Statistics Day Conference: (Emphasis mine)

…in the Reserve Bank we are handicapped by the reliability of some of the basic data that we need to use in policy calculations. In particular, the data we get on unemployment and wages do not inspire confidence as regards quality. The recently put out data on employment throw up a paradox as they simultaneously indicate fewer jobs created in the five year period to 2010 along with a decline in the long-term unemployment rate. On the issue of wage statistics, the upward pressure on wages in the unorganized sector is inconsistent with what are believed to be high rates of unemployment and underemployment in the informal economy.

I don’t believe any of the unemployment statistics thrown up anyhow, because the methodology adopted to collect such data is ridden with holes. However, we must wait for the next round; Subbarao mentions the NSO will be improving on it.

The Index of Industrial Production (IIP) is another statistic that has shown counter-intuitive trends. During the period when the global financial crisis was at its peak – December 2008 to June 2009 – IIP growth was positive according to the then available IIP series. This was contrary to our assessment of the underlying trend of some deceleration on account of the crisis. The new IIP series, revised with 2004/05 as the base, now shows that IIP growth was, in fact, negative during that period vindicating our intuition. Again, the old IIP series indicated that industrial activity slowed in the second half of last year (2010/11) relative to the first half but the revised IIP series shows that industrial growth maintained roughly the same pace between the two halves of the fiscal year.

Another problem with IIP has been its volatility, with the volatility being even larger in the capital goods sector. This is analytically bewildering. The volatility persists in new series too. It is important for policy purposes to determine whether the root cause of such behaviour is the production decisions in the wake of uncertainty or whether it is due to the compilation process.

The IIP data is utter tripe. Not only is the data volatile, it is utterly unreliable because whenever they want they revise the data, multiple times and the new numbers are about as nonsensical as the old ones. And they don’t match any other economic indicator. Recently, as I’ve noted, inflation revisions have reached a level of 4% – that is, inflation was revised to 4% higher than first reported, from 11% to 15%. This is unacceptable, and to RBI it must like: What the F were they thinking?

The Reserve Bank’s policy formulation is also handicapped by frequent revisions to data. We make policies in real time and if the provisional data that these are based on are inaccurate, the resultant policies can turn out to be sub-optimal choices. Take estimates of GDP growth. For the year 2009-10, for example, the Advance Estimate of GDP growth rate at market prices from the expenditure side, that came out in February 2010, was 6.8 per cent. That was changed to 7.7 per cent in the Revised Estimate in May 2010 and further to 9.1 per cent in the Quick Estimate in February 2011. Therefore, policy that per force had to use information on Advance Estimate of GDP was fraught with the risk of underestimating the growth momentum.

Mr. Subbarao then goes to acknowledge some issues with the WPI such as:

  • We need use CPI (Consumer Price Index) which has a better idea of demand, plus contains services which WPI doesn’t.
  • But we have crappy CPIs. .
  • So we’re basically running blind, for the most part.

They do want to create better financial indicators as well, such as real estate, capital flows, credit data, liquidity and market risk indicators. That would be quite welcome.