Policymaking at the Reserve Bank is often failed by 'bewildering' quality of data that does not reflect real economic activity, raising doubts on its growth and inflation forecasts, Governor D Subbarao said amid debate whether the last few years of growth created jobs, or destroyed them.
A field study of demand by Goldman Sachs validates the governor's doubts about various numbers such as the Wholesale Price Index and Index of Industrial Production, as 10 rate hikes in the past 15 months are still not dampening demand while official data points to a slowdown.
At the "Reserve Bank, we are handicapped by the reliability of some of the basic data that we need to use in policy calculations", Subbarao said at the 5th Annual Statistics Day Conference. "The recently put-out data on employment throw up a paradox as they simultaneously indicate fewer jobs created in the five-year period to 2010 along with a decline in the long-term unemployment rate." Economic forecasts of every institution, from the Central Statistical Organisation to the Planning Commission and the central bank, have been questioned in the last two years as many of them turned out to be inaccurate, forcing revisions.
VOLATILITY PERSISTS IN NEW IIP SERIES
Probably, the dubious data made policymakers mis-read the evolving situation that is now blamed for the economy 'overheating'. "Rising incomes, accumulated wealth from the past decade, and confidence in future earnings ability are driving consumption demand from premium apples to cosmetics, and edible oils to LED TVs," says Tushar Poddar, economist at Goldman Sachs.
"The interest rate increases have thus barely had an impact on the consumption demand from unlevered middle-class Indian households." The world's biggest securities firm, in its field study, has found that there has been no let-up in demand for hair oils even after a 35% rise in prices. The largest retail store in Ahmedabad clocked a 30% rise in sales this year despite price increases.
"The marketing head of a food company says that they have been raising the prices of premium apples every month, without any impact on demand," says Goldman. "They wanted to see the ability of the consumer to absorb the price increases, and thus demand has been price-inelastic."
The RBI and government attributed rising prices to food products in early stages, but recent data indicates a spike in prices of manufactured products. In the last few months, data on IIP and GDP growth have been too volatile for even experts to make an educated guess.
"This is analytically bewildering," said Subbarao on the IIP. "The volatility persists in new series too," which was supposed to smoothen the fluctuations. ``For the longest period of time, entire 2010 and even as late as May this year, both the authorities and analysts had been holding on to the nearly religious view that India's inflation was all due to unfortunate supply shocks and acts of God.
Needless to say the RBI raised rates with none of the urgency that the situation demanded until May this year. More than a year after the inflation scare began,'' Jahangir Aziz, chief india economist at JPMorgan said. For 2009-10, the advance estimate of GDP growth rate at market prices from the expenditure side, which came out in February 2010, was 6.8%. That was changed to 7.7% in the revised estimates in May 2010 and again to 9.1% in the quick estimates in February 2011.
Initial WPI estimates for January 2011 were 8.2%, and 8.3% for February. Both were raised by 120 basis points later. A basis point is 0.01 percentage point. But it may not be fair to conclude that the monetary policy measures were ineffective.
"It's a dynamic situation," says Sonal Varma, economist at Nomura Securities. "It may not be fair to say that policy action by the Reserve Bank has not had the desired impact." The central bank, which looks at various data to take decisions, in its last policy relied on corporate earnings numbers to justify its move to raise rates by a quarter point. Amid demand for an end to rate increases based on the dubious WPI and IIP data, Subbarao raised rates pointing to sharp rise in absolute sales and profit, though profitability fell.
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