Output, prices and employment are the three most important pieces of economic data in any modern economy. These are critical in any understanding of the trends in the real economy.
A monthly release of such data with a lag of no more than a couple of weeks from the end of the month would be ideal. This would provide a reasonable understanding of the current trends in the economy to help governments and businesses take appropriate decisions.
India?s record in providing these elementary statistics has been dismal in recent times. Bad measurement, bad choices and ignorance describe most aptly the malaise afflicting the measurement of output, prices and employment. We have only one monthly measure of output?the Index of Industrial Production (IIP). We need to have a comprehensive measure that includes at least the organised services sector to measure output correctly. However, even the IIP that covers a mere quarter of the economy is badly measured.
The IIP suffers from inclusion of archaic products, the use of inappropriate weights, the application of an outdated computational methodology and a patchy response rate. The Central Statistical Organisation (CSO) is working on a new IIP. But, this seems to be taking longer than it takes for industry to go through a structural change. As a result, it is quite likely that by the time the new IIP is released, it will already be outdated.
In the meanwhile, the current IIP seems to give us a false sense of a revival. According to IIP, the manufacturing sector recorded a 3.3 per cent y-o-y growth in output in the quarter ended June 2009 after a 0.5 and 0.3 per cent growth in the preceding two quarters. However, the inflation-adjusted sales of listed manufacturing companies shrunk by 0.4 per cent in the same period. Inflation-adjusted sales of manufacturing companies show a y-o-y shrinkage for three consecutive quarters ended June 2009. The IIP for manufacturing does not show any shrinkage at all.
In general, the IIP fails to capture the amplitude of the growth cycle adequately. It failed to capture the fall in the last three quarters adequately as it failed to capture the rise sufficiently in the preceding three quarters. We need a new IIP urgently. And, we need to move to dynamic frames and chain-linked index computations. Dynamic frames and chain-linked computations apply to all index computations. In the current system, the index is computed only from those units that existed in the base year. New units do not get added and weights are fixed in the base year. If the economy undergoes structural changes and the base year remains unchanged for too long, such a methodology systematically underestimates growth. A chain-linked index methodology overcomes this problem.
The bad measurement problem of the IIP (output) also applies to the measurement of inflation (changes in prices). We have a popular wholesale price index (WPI) and several not-so-popular consumer price indices (CPI). The WPI does not include the services sector and its weights do not reflect anyone?s consumption pattern in particular. Yet, the WPI is taken as our measure of inflation. This is a bad choice.The choice of the WPI has in the recent past led to bad policy interventions. RBI raised interest rates and squeezed out liquidity during the first half of 2008-09 when high international commodity prices propelled the WPI. But, the CPI in those days was much calmer and did not justify RBI?s tough measures. Today, we are possibly misunderstanding the inflationary pressures in the economy by seeing a near-zero WPI growth when the CPI-IW is touching a shocking 12 per cent.
Why do we have four different CPIs? There is one each for industrial workers, agricultural labourers, rural labourers and urban non-manual urban employees. Are their consumption patterns so dramatically different that there cannot be just one representative consumer price index? I think the bi-modal distributions?rural & urban and industrial & non-manual workers, etc?are not relevant anymore.
There isn’t much to discuss on employment?literally. Our experience in measuring employment (or unemployment) is brusque. We simply do not measure them in a meaningful sense. There are no monthly releases of unemployment rates and so there are no discussions. Ignorance ensures bliss. The ministry of labour & employment made a brave attempt to measure the impact of the global liquidity crisis on employment. It did measure job losses during the period but it was a limited exercise. Building statistical systems needs a more sustainable machinery. We need a stronger CSO that takes full responsibility of delivering reliable statistics.
All macroeconomic analysis, forecasting models and strategic planning are rendered futile by bad data. Output, prices and employment (the ones discussed here) are the most elementary pieces of economic data. We need to worry beyond these. How good is the data on private consumption expenditure, on capital formation and even savings? India?s statistical system deserves a lot more top-level and meaningful attention than it gets currently.
Lord Kelvin said ?If you cannot measure it, you cannot improve it.? But, what if we measure it (the economy) badly? Then, we run the risk of ruining it. This is one risk that can be and should be avoided.
The author heads the Centre for Monitoring Indian Economy
