The problem with Indian Economic Data

It is of utmost importance that farm and factory data collection methods in India be expanded and upgraded electronically to provide precise numbers. The Central Statistics Office drastically reduced the Index of Industrial Production (IIP) growth to 7.3% for April from 14.5% a week after the RBI showed concern over the quality of data.

Such revisions are quite bizarre and have a deeper implication because such high-frequency data is used for high-frequency monetary policy stances.
The April number would have justified increasing interest rate based on robust investment growth. But it seems like capital goods production was stable at best.

For reasons unknown, the GDP, IIP and Wholesale Price Index (WPI) were changed subsequently. This statement resulted from a high volatility in the growth numbers. Although having a new series is necessary, the question is if it would address the question of volatility.

The annual volatility for the older series 16.4% has been increased to 22.6% in the new series. For the WPI series, the annualized volatility was 11.5 per cent and 10.2 per cent respectively meaning there has been improvement in the WPI, but not the IIP.

There are basically two problem areas that need to be addressed.
Farm price :-
Farm Price these days comes from mandis, where transactions and prices are opaque. The AGMARKNET the official source of dara shows that prices within a rather wide range that is not helpful. Since farm products are seasonal, they do not enter the mandis every month but are traded widely all the same, which moderates the WPI numbers because they are dependent on the quotes received from mandis. The solution is to have electronic mandis where all transactions are recorded so that we have actual prices that can be weighted by the trades that take place.

Connect all the mandis electronically:-
There is a need to electronically connect all the mandis and have a database in which all firms registered with the Registrar of Companies have to mandatorily enter their production and price numbers.

Look at other leading indicators:-
There is a need to have a look at other leading indicators when taking policy decisions based on monetary data that is usually precise because it comes from a smaller universe of commercial banks.

Never look at a single month data:-
Whenever you are interpreting data, never look at single month data points to eschew the trap of base year and seasonal influences. It would be better to look at cumulative numbers.
The Reserve Bank of India (RBI) should seriously think of going back to two policies with need-based Keynesian intervention.

Source:http://www.rediff.com/business
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