The Reserve Bank of India is handicapped in its policy calculations by the reliability of data relating to growth, wages and unemployment, according to the Governor, Dr D. Subbarao.
For instance, the quality of data on unemployment and wages does not inspire confidence and the Index of Industrial Production (IIP) too has shown counter-intuitive trends, the Governor said while addressing the Statistics Day Conference on Tuesday.
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 the RBI's assessment of the underlying trend of some deceleration on account of the crisis.
New IIP series
The new IIP series, revised with 2004-05 as the base, now shows that IIP growth was, in fact, negative during that period, vindicating the RBI's intuition, Dr Subbarao said.
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, which persists in the new series too, the governor said.
“…poor quality data could potentially mislead policy calculations,'' Dr Subbarao said.
The RBI's policy formulation is also handicapped by frequent revisions to data. The RBI makes 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.
Inflation projection
“As a matter of policy guidance for stakeholders, we are obliged to give our projection of inflation. Such a projection is evidently based on data available at that point in time. But if the provisional data that we feed into the econometric model is off-track and does not exhibit any systematic pattern, our projections of inflation too gets off-track,” the Governor said.
For example, initial estimates of WPI inflation were 8.2 per cent for January 2011 and 8.3 per cent for February 2011. Both these numbers were substantially revised upwards by 120 basis points each. Oftentimes, it is not clear if the revisions are occasioned by one-off factors or systemic factors. “Nevertheless, each time we have to make an assessment of the inflation situation, we are left to double guessing how the provisional number might be revised,” Dr Subbarao added.