Thursday, January 22, 2015

Economic Indices: Let’s move from datum to dictum


Once again, the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) are back in the news in the context of the recent RBI rate cut which some experts deem ‘unexpected’ while others call a ‘foregone conclusion’. The diversity of opinions essentially stems from the difference in the interpretations of the WPI and CPI figures.

This time around, the furore and fervour was over the 0.1 per cent December 2014 mark (0.0% for the previous month and 6.4% during the corresponding month of the previous year). The rapid fall in inflation rate has been attributed to a host of factors – from falling crude oil prices to the dramatic drop in prices of cereals and vegetables. The status quo proponents who had earlier advocated no immediate RBI rate cuts argued that the inflation drop was transient and the fiscal situation was yet dicey. The ones who find the rate cut obvious held that the WPI and CPI results were in itself sufficient evidence of the monetary easing that followed suit.

Of the host of other opinion makers and shakers, some predicted a negative trend for WPI going forward but assured us all the same that India’s robust growth story would insulate us from any deflationary intrusion. Some identified the decline in manufactured articles component of WPI to be a worrisome factor signalling stagnant entrepreneurial action in favour of non-productive endeavours. There was a section attributing the inflation drop to the new government at the centre and its clarion call of ‘Make in India’ which they believed had a desirable effect on commodity prices much the same way it affected the momentum on the bourses. Then there were those who advised us to be wary of the 0 per cent WPI, stating that huge foreign capital inflows with no commensurate economic growth would only create infertile liquidity and rampant speculation which, if not reversed through concrete economic growth, will lead to a massive FII exodus.

This is not to undermine the insights and opinions of different experts, some of which seem logical and incisive. But it’s indeed surprising that a very few of them feel the need to validate the authenticity of the compilation that forms the basis for the macroeconomic computation, leave alone seeking a reform spree in this neglected space.

While it’s fine to draw patterns out of the published economic data, we should collectively and aggressively demand more clarity in the way WPI or its distant cousin CPI is collated and calculated in the language of the common people for whom they are supposed to matter the most.

It’s pertinent to note that Amar Ambani, Head - Research, IIFL had aptly stressed on the need to rationalize the computation of economic indicators with specific reference to the IIP calculation, in his perceptive blog piece titled Provision without vision.

We need more of such independent industry crusaders to highlight the criticality of data quality and integrity in policy formulation and its ensuing impact on industry, business and households.

It’s high time we demystified the glorious economic abbreviations that fuel a debate among practicing economists and fiscal experts and yet mean little or nothing to the common man. Rather than board ceremonial flights of imagined realities consequent to the published data, our experts would do well to demand a governmental initiative to simplify the data for better public comprehension. It’s not enough to set up information websites and portals, the whole process should be articulated in lucid terms such that common people are able to make sense of the WPIs and CPIs which are indices, meaning they are relative in essence, to be studied in comparison to some base year. Not many households are even aware of the basic difference between the two, the fact that WPI pertains to the price change of specified goods, classified under three heads; each assigned a per cent weightage: 1 Manufacturing articles – chemicals, metals and food, 2 Primary Articles – Food items, Non-food items & minerals and 3 Fuel – oil, electricity and coal while CPI is a reflection of changes in the urban and rural retail prices of five heads in descending order of weightage – 1 Food, beverages, tobacco, 2 Miscellaneous – Health, Education, Amusement, 3 Housing (not considered for Rural CPI), 4 Fuel and lighting and 5 Clothing, bedding, footwear. It’s only when they gauge the difference will they learn the fact that CPI is more relevant to their day to day life as compared to WPI. Can the government initiate a MyGov-like retail-centric campaign aimed at better public awareness of these seemingly arid indicators?

As for our experts, before they bombard the public domain with tons and tons of opinionated literature, they should unfold, in public interest, the subjective considerations in basing trends and patterns on the given indices. The common people should be made aware of the inherent challenges involved in the voluntary collection of weekly and monthly WPI data from different manufacturing entities of the country, notwithstanding the web portal incepted for the purpose or the help rendered by the National Sample Survey Organization and post offices. How many of us know that India’s rural expanse poses a huge problem in the monthly CPI data collection as not all villages can yet be covered under the said purview.

Once the problem becomes crystal clear, it would become obvious why the provisional WPI data is at times starkly different than the annual version and why the CPI data is not wholly adequate. Other related concerns related to indices would also become apparent, including that of shifting base years which call for periodic revisions and the inherent inadequacy of the Laspeyres formula used for calculating weighted arithmetic mean. Named after the German economist, this formula on its own can’t address the changing product mix thriving on an ever-evolving economic landscape. Products once popular become redundant with time and hence the components considered for calculations call for constant if not frequent modification. Already, the suitability of the formula is being questioned by entities like the IMF which have prescribed alternatives employing geometric averaging to weed out the Laspeyres bias from the computation.

Not that the government has not addressed the subjectivity of the given exercise. Based on the Abhijit Sen Committee recommendations, the base year was shifted to 2004 and the WPI basket was stuffed with 676 items as against 435. Direct imports and exports were also excluded from the WPI purview. The ensuing Saumitra Chaudhuri Committee has recommended several key modifications like taking the tally of previewed items to 1200, expanding the data collection drive for more accurate estimates and making component weightage alterations, more in favour of manufacturing goods and less for primary articles. And not to forget RBI Governor’s decision, in line with the Urjit Patel recommendation, to consider CPI in lieu of WPI for designing monetary policies.

The moot point, however, is the honest acknowledgment and clear communication of the challenges in collection, collation, computation and curation of economic data which don’t get the attention and visibility they deserve despite being the basis for a variety of key economic and business decisions – from formulating policies and monitoring prices to fixing escalation clauses and computing dearness allowance. Needless to say, caring for this precision and validation is the collective responsibility of the government and the private sector.

We can’t agree more with former RBI governor Dr. Duvvuri Subbarao’s astute reflection during his inaugural address at the July 2011 Statistics Day Conference: “The decisions that we in the Reserve Bank make have a profound impact on the macro economy, and errors can be costly. Our policy judgement should therefore be based not only on state of the art skills in data analysis and interpretation but also on an intellectual value system of ruthlessly honest validation and peer review.”