India's Economic Data Losing Credibility

huaxia rox

Senior Member
Apr 4, 2011
India’s Economic Data Losing Credibility - India Real Time - WSJ

Can India's economic data be trusted?

Economists and investors say they are finding it increasingly hard. "Market participants are not able to decide what to make of this data," said Brinda Jagirdar, economist at the State Bank of India.

Frequent and sharp revisions in inflation and factory output data—key determinants of monetary policy—have confounded experts in recent months.

On Monday, India's inflation for April was revised upwards to 7.5% from 7.23%. And last week, the government revised India's industrial production data for April to show a contraction of 0.9% versus a growth of 0.1% as stated previously.

Government estimates missed their expectations by a shockingly large margin for January's factory output growth.

While initial estimates expected it to grow 6.89% from a year earlier, this was later revised down to 1.1%. Officials blamed this on incorrect sugar output data.

Getting data estimates wrong matters as it can have sweeping repercussions on policy making.

For instance, the Reserve Bank of India's decision to cut the benchmark interest rate by half-percentage-point in April – thereby reversing three years of rate increases – was likely influenced by government estimates that inflation was easing. This turned out not to be the case.

The day before the RBI's rate cut, the government released provisional data that showed that inflation, as measured by the wholesale price index, eased to 6.89% in March from a year compared to 6.95% in February. A few weeks later, the March inflation data was revised to 7.69%.

This may have persuaded the RBI to behave differently, since upward revisions on inflation data is generally a trigger for monetary tightening.

Unsurprisingly, the central bank has raised concerns on the reliability of government data. In a speech in July, RBI Governor Duvvuri Subbarao said the central bank was "handicapped" by the unreliability of some basic data it needs for policy calculations.

The Department of Industrial Policy and Promotion has reportedly set up a panel to look into India's industrial output data, as it has been quite volatile in recent years. A department official was unavailable for comment.

So, what's causing these revisions? Analysts say the problem lies in the way the data is obtained.

In India, inflation data is collected by the Ministry of Commerce and Industry, while output data is put together by the Ministry of Statistics and Programme Implementation.

Both ministries rely on information about production and price levels sent by a variety of sources, including individual manufacturers and industry associations.

Different products are assigned different weights depending on their value. The respondents send data voluntarily and authorities rarely question its accuracy.

Sometimes prices on certain products come too late to be included in the data release. "In such cases, the prices of the missing quotations are either repeated or estimated depending on the nature of the commodity," says the commerce ministry's manual for compiling the wholesale price index.

"It's like sending out a questionnaire to a group of people," says Madan Sabnavis, chief economist at CARE Ratings "If only half answer in time, you may end up with a completely different picture."

Another problem is the unorganized nature of most markets in India, where a large number of transactions are done using cash. Data on such sales and prices is not readily available.

Economists say authorities should focus on getting accurate data even if it means that market participants have to wait longer for the data.

"We should not strive for high-frequency data, but for correct data," says Mr. Sabnavis.

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