Inflation-mapping a case of six blind men and no elephant-II

The database on which estimates of major economic indicators are based is a source of major embarrassment for the government. For all the brouhaha over the prices of food and other items of common consumption, inflation estimates are unreliable, as we saw in the first part of this article yesterday. Today, we take up certain other major indicators.
Index of Industrial Production (IIP)

The case of the IIP is extremely unfortunate, given that the finance minister himself finds the estimates unreliable (Rediff Money, Oct 10, 2008).

About real estate, the less said the better. We do not so much as have a housing price index, but everybody talks about real estate prices going up or down, based on a reading of tea leaves.

Savings data
The savings rate of the economy is estimated to be around 35% during 2007-2008 and more than 90% of this comes from household savings. The households in our data include consuming households as well as producing households.

The partnership and proprietorship firms in trade, etc are categorised as households and hence we need to have a segregation of pure wage-earning and consuming households and enterprise households. Due to lack of detailed data on the unorganised sector, much of the discussion on our economy is centred on the so-called India Inc, which is a euphemism for the Sensex stocks. This results in distortion in our policy formulation and also deficiencies in allocation of resources.

Employment
We also do not have reliable data pertaining to employment in the service activities.
According to the Economic Survey (2007-2008), only 3.75 lakh persons are employed in the wholesale and retail trade and only 44,000 in the construction industry for the whole of India. In a city like Bangalore alone, the construction workers will run into lakhs.

This database is amusing but for its tragic consequences. We can infer that the role of the ‘unorganised sector’ would be substantial even in manufacturing, in the context of the massive outsourcing of production and other activities. And these are only some of the many examples one can provide of the inadequacy of our database.

Without simple and reliable numbers pertaining to national income, savings and labour, etc, it would a Herculean task to plan for a large country such as India. Many of the assumptions pertaining to the fifties and sixties, which may not be appropriate today, are still being used liberally.

As people who care to look deeper than the surface would agree, POTA data (i.e., data pulled out of thin air!) may be more harmful than lack of adequate data since they can distort resource allocation.

Yet, we try to formulate our five-year plans, annual budgets and other socio-economic legislations with such weak databases.

Databases at the state level need substantial improvement since they constitute the building blocks for the national statistical system. The department of planning and statistics is dysfunctional in many states and the minister given charge of such a department typically feels he has been given an “unimportant” portfolio.

It is also important to explore the involvement of the private sector in analysis and dissemination of statistical information. By outsourcing the publication of collected data, we may achieve timely publication and also more readable books and reports. Of course, the collection of data can be with the government since it may not want to involve private agencies in that sphere due to a fear of distortion.

We need to minimise the lag between data collection and dissemination since in many areas, the lag is nearly two years. It is not of much use to policy formulators or to researchers for forecasting purposes. In the current context, we are often forced to use “quick estimates” and “provisional estimates” and “tentative figures” and “preliminary numbers” for long periods of over a year.

This is rather unfortunate considering we aspire to become a major power in the world. It is often told in studies pertaining to databases that when the past is imperfect, the present is tense and the future uncertain.

As pointed out by the National Statistical Commission chaired by Dr Rangarajan, the mission statement of the Indian statistical system shall be “to provide, within the decentralised structure of the system, reliable, timely and credible social and economic statistics to assist decision-making within and outside the government, stimulate research and promote informed debate relating to conditions affecting people’s life” (Report of the National Statistical Commission; Volume 1, pp.82).

It is a matter of shame that a country, which has produced doyens of statistics such as D D Kosambi, Mahalanobis, R C Bose, and C R Rao, should have such deficiencies in the statistical system.

India deserves a better database since it is a sine qua non for orderly growth and meaningful policy formulation. Otherwise, the whole process would continue to be the story of the six blind men trying to understand an elephant — and in this case, the elephant is not even there. (Concluded)

The writer is professor of finance and control, Indian Institute of Management —Bangalore, and can be reached at vaidya@iimb.ernet.in. Views are personal.