Are inflation figures the least trusted official statistics?

Business Line, February 8, 2007 Inflation is the talk of the town, yet the government has no reliable data as the price indices either do not reflect the modern milieu or are available with too much lag to be of any real use. Citing the creation of a personal inflation calculator by Britain, R. VAIDYANATHAN suggests that India could consider outsourcing key statistical activity to generate reliable and timely numbers. R. VAIDYANATHAN The various channels that are desperate for `breaking news' can think of conducting an interesting competition: Identifying the least trusted government statistics. Is it the number of people dead in a riot or the people below poverty line or the inflation figures? My guess is that inflation figures would be the runaway winner. The Government's Economic Advisory Council, at its recent meeting, expressed concern about inflationary pressures in the economy but is confident that they can be contained and the growth rate maintained. But, without malice, one would like to ask the Government about the numbers over which it is concerned. Indeed, more than the rate of inflation, the unreliable and noncredible numbers are a major embarrassment to the Government and that should be a matter of concern. At the national level there are four consumer price index numbers. These are: Consumer Price Index (CPI) for industrial workers (IW), CPI for Agricultural Labourers (AL), CPI for Rural Labourers (RL) and CPI for Urban Non-Manual Employees (UNME). While the first three are compiled by the Labour Bureau in the Ministry of Labour, the last one is released by the Central Statistical Organisation in the Ministry of Statistics and Programme Implementation.

The CPI numbers are considered only partial indices as each caters to a specific segment of the population with different base years. The State-level CPI numbers lack uniformity with the oldest base year being 1939 (for a segment of Bihar). Fewer than 20 States compile and construct an index. Only a few States have base year after 1981-82. The major concerns and discussions stem from the Wholesale Price Index (WPI) compiled by the Office of the Economic Advisor (OEA) in the Ministry of Industry on a weekly basis based on the price quotations collected by official and non-official agencies. The main issues pertain to the coverage and the index not reflecting the travails of the common man. For instance, the annual inflation (in WPI) increased to 6.11 per cent on January 20, higher than the previous week's annual rise of 5.95 per cent. The increase is primarily on account of higher prices of manufactured products and food articles foodgrains (9.46 per cent year-on-year), pulses (21.39 per cent Y-o-Y), fruits (14.50 per cent Y-o-Y), and oilseeds (21.27 per cent Y-oY). Thus, the prices of a plate of two idlis has gone up from Rs 4 to Rs 8 in the last year. That is, for a student or a worker living on his own, the price of just one item of consumption has gone up by 100 per cent. Check the grocery bills, you will see that urad dal now sells at Rs 75 a kg from Rs 40 last year. Easily perceptible is the significant gap between wholesale and retail and critical are the regional variations for instance, wheat impacts people in the North more than in the South, and so on with different type of dals and oils. Then, there is the question of weights given to the WPI components. For instance, food items have around 22 per cent weightage in the WPI but it is well-known that they constitute more than 60 per cent of the consumption basket of the vast majority of people. Hence, food inflation hurts hard the vulnerable segments but this is not fully reflected in the WPI, giving the government a cover. Under-pricing Another issue is the suppressing of price increase by government decisions or by subsidies, as in the case of kerosene, LPG, or electricity. Under-pricing facilitates short-term suppression but exacerbates the inflationary expectations. In the case of sugar, the government controls it through the PDS (public distribution system) prices and freesale sugar by monthly dispatch orders. Hence, there can be a temporary freeze on the prices of some items to minimise logical rise due to demand-supply mismatch. The non-inclusion of a number of services in the WPI, especially when the sector constitutes nearly 60 per cent of the economy, distorts the real inflation picture. For instance, doctor's fees have gone up by more than 100 per cent in the last three years as also the cost of education and rentals. Yet, most of these are not reflected in the WPI. The Consumer Price Index for Industrial Workers covers those working in factories, mines, plantations, railways, public transport undertakings, electricity generation and distribution units, and ports.

Given the significant changes in the employment scene, especially the larger role of the services sector, including information technology and IT-enabled services, it is only appropriate to completely redefine "industry" rather that hang on to the mid-19th century definition. Inflation calculators The UK statistical agency Office for National Statistics (ONS) has initiated a novel scheme by which British consumers will be able to work out their own inflation rate. The agency has put up on its web site a personal inflation calculator after insinuations became rife that the official index under-estimates inflation. The tool will help individual households get an idea of their spending patterns and compare it with the average and the effect it has on current inflation. Interestingly, an ONS survey two years ago found that the inflation figures were among the least trusted official statistics, ranked fourth out of six key measures. The ONS's Chief Statistician argues that "inflation figures are based on the average spending patterns. But every household is different and the way the inflation affects a family depends on how they spend their money." Will our government statistical agency be enthusiastic in attempting to create such a calculator? It may not be feasible given our state of affairs in collecting and disseminating data. For example, the scheme on Consumer Price Index for Industrial Workers was cleared by the Expenditure Finance Committee in 1996 but the work on it could start only in 1999 due to various administrative reasons (see report of the National Statistical Commission, page 332). One possibility is to consider outsourcing this important statistical activity to private agencies such as CMIE, with the Government Statistical Commission monitoring the accuracy of the data collection, the sample frame and the interpretation. The entire process of collection, analysis and dissemination can be left to private agencies. This would result in a more reliable and timely inflation indicator. This should be the first step in gradually outsourcing most of the data series and downsizing the government statistical set-up, particularly at the State-level, which is mostly ineffective. Else, such important numbers as inflation will not be reliable and the wide divergence between government figures and reality can become politically explosive. The next time a minister wants to know about inflation, the suggestion is just visit the nearest Mahila Mandal on an afternoon. The politician will not only understand real inflation but also learn the method to compute it. That is called practical education. (The author is Professor of Finance and Control, Indian Institute of Management-Bangalore, and can be contacted at vaidya@iimb.ernet.in. The views are personal and do not reflect that of his organisation.) (This article was published in the Business Line print edition dated February 8, 2007)