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Need to revamp economic data measurement methods

Gyanendra Keshri, Executive Editor, INCLUSION

The Index of Industrial Production (IIP), a measure of the country's industrial output, posted a paltry growth of 0.5 per cent in July.

Wide fluctuations and sharp revisions in macro-economic data like GDP, industrial output and inflation raises questions over the credibility of these numbers. In the past couple of years there have been sharp and multiple revisions in economic growth, industrial output, foreign trade and inflation data. Moreover, a wide fluctuation in these data on month-on-month or quarter-on-quarter basis has dented the credibility.  

Let’s take the example of the industrial output data released last week. The Index of Industrial Production (IIP), a measure of the country’s industrial output, posted a paltry growth of 0.5 per cent in July, as per the data released by the Central Statistics Office (CSO).  

In the previous two months the industrial output growth was 3.4 per cent and 4.7 per cent, respectively. June figure, which was originally reported at 3.4 per cent, is now revised upward at 3.9 per cent – a variation of half a percent. The June industrial output data will undergo a final revision along with the release of the initial data for the month of September.

This is not one-off case. A sharp variation in the initial and revised data is now seen quite often. The Gross Domestic Product (GDP) for the financial year 2012-13 was revised down to 4.5 per cent from 5 per cent. This revised data was released in January 2014, almost a year after the end of the year. The 2010-11 data was revised down to 8.9 per cent from 9.3 per cent, while 2011-12 data was revised upwards to 6.7 per cent from 6.2 per cent.

These data are critical for policy formulations. In the absence of reliable data, policy actions are bound to go wrong. Probably due to misdirected action on interest rates, the Reserve Bank of India (RBI) has failed to rein in inflation and hurt economic growth. Other policy actions also get generally misdirected due to the absence of reliable data.

This highlights the need for a revamping the way we measure our macro-economic data.

First and foremost there is need to change the base year. The current base year for most data including GDP, IIP and WPI inflation is 2004-05. What’s the point in keeping the base year almost 10 years old. The basic criterion for the base year is that it should be a “normal year”. It is argued that since 2008 the Indian economy is on a roller coaster and the base year should not be chosen from the year that had witnessed wide fluctuations in data. There is need to revisit this selection criterion for the base year. The financial year 2011-12 can be made a base year and a policy should be put in place to revise periodically and at a shorter interval, say every two years.

Moreover, there is need to revamp the methodology of collecting data and make it more realistic. Services and informal sector accounts for more than three-fifth of India’s $1.9 trillion economy. But there is not precise data available for these sectors. The government relies on surveys and samples to calculate data for these sectors. Data for unorganised sector that contributes nearly half of the country’s GDP is captured through five yearly surveys by the CSO. There must be a scientific methodology to compile data for unorganised sector.

In case of IIP and WPI inflation, product mix needed to be revamped. The IIP covers 682 items, categorised in three broad areas mining and quarrying, manufacturing and electricity, with weightage of 14.16 per cent, 75.53 per cent, and 10.32 per cent, respectively.

The WPI is based on a representative basket of wholesale goods and its changes are used as a key measure of inflation. The calculation is based on price plus excise duty minus premium or discount. The Indian economy has undergone huge transformation in the past two decades and the consumption pattern has changed drastically with the economic advancement. There is need to revamp the system keeping in mind the new economic paradigms.

(Gyanendra Keshri can be reached at gyanendra@skoch.in)

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