By Jatin Bavishi
Arithmetic often immaculately presents what the eye already sees. But, it also happens that it hides important details in the pursuit. For data pertaining to GDP or inflation, this happens more as a rule than as an exception. These are massive aggregation exercises that, in the end, provide us with a number which claims to show precisely the state of what it measures. This number is the be-all and end-all of policies, often at the cost of the unrepresented smaller voices. India’s government recently made changes to key indices in an attempt to reduce this effect. However, it might not be enough.
The Indian economy is peculiar in many ways. It has a massive informal economy, a highly segmented labour market, and heavily interlinked agricultural and industrial markets, along with diversity in geography and demography. All of this substantially weakens the explanatory powers of the numbers in question.
The government’s revision exercise
Index numbers are devices for measuring the net amount of change in a group of related variables from a given point of time (called the base year). The goal behind the present government’s move to change the base year for the Wholesale Price Index (WPI) and the Index of Industrial Production (IIP) is to bring these two measures in line with the current state of the economy. The move will bring all the key macroeconomic indicatorsIIP, WPI, CPI (Consumer Price Index), national accountson a common base year of 2011-12, making comparisons easier.
The new item basket for IIP will include 55 mining products and 809 manufacturing products (up from 620 previously) that would be re-grouped into 521 item groups. In the new series of the WPI, the number of items covered has increased from 676 to 697. In all, 199 new items have been added and 146 old items have been dropped.
What drives differences in indices?
There is no love lost between the two most commonly used measures of inflation, the CPI and WPI. Although the former comprises a family of indices, for most analytical purposes we use the CPI. It might appear absurd to some that in the year 2013-15 when the CPI was showing a secular upward trend, the WPI was flirting in the negative zone. This divergence arises from the basket of commodities which are used for examination. The WPI excludes services altogether. Its components (in accordance with weights) are manufactured products, primary articles, and fuel and power. The CPI, on the other hand, assigns weights to items the WPI neglects. Examples include healthcare, education, clothing, and transportation, which form an important part of our consumption. Fuel and metal prices have been plummeting since 2014, whereas the prices of food and important services have been rising. This explains the chasm between the indices.
Similarly, we find vast differences between the IIP and both the Annual Survey of Industries (ASI) and the GDP. The most commonly cited reason for this is that the IIP is a volume concept (i.e. prices are not included) whereas the ASI and GDP are value-added concepts. Such revisions as those made by the Indian government this May often inflate (pun not intended) the GDP numbers. Since the GDP is a summation of value added, it can show a positive growth even as the quantity of output remains the same if prices are falling (as we are seeing currently in fuel and metals). Moreover, these indices use Laspeyres Price Index, which overestimates the true value of some parameters, while other things remain the same. The underlying point is that all index number are highly sensitive to the basket, the base year, and the method of data collection. This makes them highly susceptible to manipulations.
So are these changes enough?
Analysts believe that the new series will be able to capture the current state of affairs of the economy by replacing the old basket of goods with a contemporary one. However, it will still not be able to reduce the volatility in the indices. This has more to do with the behavioural aspects of people rather than the shortcomings of statistics. Some feel what is also needed is a total overhaul of India’s data collection and analysis methods. Robust data on many different subjectsincluding the number of jobs being created, taxes being paid, houses being built, and production of different industriesis needed from reliable sources.
Luckily, rapid advances in technology could make both surveying and analysing data much faster. Politically, this would help the present government to create an illusion of high growth and stable macroeconomic fundamentals. Overall, we must not allow ourselves to become complacent about the economy’s future based on just one estimate. We must, at best, take it with a pinch of salt.
Featured Image Source: Hindustan Times