The economic data released by the government last week showed the kind of difficulties both policymakers and investors would face in the near to medium term. For the second month in a row, the National Statistical Office (NSO) did not release the headline consumer price inflation
number because of difficulties in data collection. The limited data showed that food inflation
stood at 9.28 per cent in May. In the case of the index of industrial production
(IIP), the NSO released only the index numbers for April, which showed that output contracted by a record 55.5 per cent. The statistics department, however, noted that it was not appropriate to compare the April data with that of previous months as a number of units reported no production. The estimate will undergo revisions in the coming months. The IIP
data indicated how the lockdown impacted industrial production, but a large revision could change the picture. While the lockdown has been relaxed significantly in most parts of the country, data collection will remain a challenge because of the continuous spread of Covid-19. Data deficiency and the possibility of large revisions would also significantly affect the quality of gross domestic product (GDP) estimates, at least for the ongoing quarter. GDP data in India undergoes significant multiple revisions even in normal times, but things would get more complicated in the coming quarters.
While most analysts now expect the economy to contract in the current fiscal year, the actual overall damage caused by the lockdown may not be known for quite some time. This could potentially affect the policy response. The Monetary Policy Committee
(MPC) of the Reserve Bank of India
(RBI) reduced the policy repo rate by 40 basis points in its May meeting but the central bank refrained from giving inflation
and growth projections. Since monetary policy works with a lag and needs to be forward-looking, it is difficult to evaluate the appropriateness of the policy response. Inflationary expectations increased sharply in the latest round of the RBI’s survey for the next three months and one year. However, inflation based on the wholesale price index slipped into negative territory in May. It is not entirely clear whether the ongoing disruption will result in a large deflationary shock, and how the recovery will affect prices.
The pandemic has, in fact, added to the problems of deficiency and lag in official data. To be sure, not much can be done in the near term. But a comprehensive review of economic data collection in India is long overdue. A number of commentators have questioned both the GDP data and subsequent revisions As this newspaper has argued in the past, it is important to build capacity to be able to gauge economic activity more closely, which will help shape a better policy response even in normal times. In this context, the central bank can work on indicators gauging economic activity and price movements, possibly based on available information with the use of technology. They would also help it make more robust projections. The idea is not to undermine the official data, but to use such indicators as additional tools. Such indicators would have given a better sense of the state of the economy in the present circumstances and helped all stakeholders, including policymakers, to make more informed decisions.