IS GOVT. ECONOMIC DATA RELIABLE ? INFLATION ETC.

We have had lot of " Corruption " talk, now lets get down to business. Economy has taken a centerstage throughout the world including India. Apart from the economic meltdown world over, which i will write later, when the dust settles down and clearer picture emerges, let us talk about economic figures, given by Govt. Of India. This will be interesting reading for business friends.

Reliability of macroeconomic data released by the govt. on weekly and monthly basis has been LONG QUESTIONED. But the unexpected slump in industrial production, particularly manufacturing, in August, 2008, has brought the problem to the fore once again. INFLATION and INDUSTRIAL PRODUCTION data have been suspect for several reasons. One, the basket of items that form the basis for measuring both inflation and industrial production has not been updated after the base year was shifted to 1993-94 to reflect structual changes in the economy's production and consumption patterns.

Far too many items, which are not commonly consumed such as typewriters, have excess weight in the IIP while increasing popular household items such as electronic gadgets are underrepresented. Two, data suffers due to poor response from the manufacturing units and inability of the collecting agencies to get timely response. That was experienced earlier this year when steel companies delayed reporting revision of prices. There is now a debate over whether the ACTUAL INFLATION rate, going by the GDP deflator is a few percentage points lower or higher than the WPI ( wholesale price index ) index reflects. The IIP data is also prone to wide fluctuation as it includes items where there are very few producers. It also does not capture large part of UNORGANISED SECTOR.

Given that this DATA forms the basis of policy response--- both fiscal and monetary--- one wonders how sound such responses are. Further, what should be the measure of inflation for the purpose of monetary policy conduct---WHOLESALE PRICE INDEX, CONSUMER PRICE INDEX or the GDP inflator ?

In today's uncertain economic climate, data accruracy is even more critical. The govt. can do its bit by updating the base year for IIP and inflation data every 5 years and improving monitoring of data collection as suggested by the National Statistical Organisation. The industry cant, meanwhile, abdicate its responsibility. Companies must share data on actual production and revision of prices, if they want better policy response.

Thus, the datas published by the govt. periodically will always remain doubtful. The datas are given after seeing the country's state of affairs, but not on factual basis. Next time when you see datas on CNBC, dont beleive them.