RBI: Data revisions crippling policymaking

Reserve Bank of India (RBI) Governor Duvvuri Subbarao on Tuesday said policymaking by the central bank had been hit by the frequent revisions in key data like that of the country’s growth, inflation and factory output.

“RBI’s policy formulation is handicapped by frequent revisions to data. We make policies in real time, and if the provisional data these are based on are inaccurate, the resultant policies can turn out to be sub-optimal choices,” Subbarao said at the central bank’s Statistics Day conference.

The governor cited the estimates of growth in gross domestic product (GDP) in 2009-10, which exhibited wide fluctuations. He said the advance GDP growth estimate at market prices from the expenditure side, published in February 2010, was 6.8 per cent, which was changed to 7.7 per cent in the revised estimate in May 2010. The estimate was again revised to 9.1 per cent in the quick estimate in February. “Therefore, policy that had to use information on advance GDP estimates was fraught with the risk of underestimating the growth momentum,” he said.

He added the volatility in the Index of Industrial Production (IIP) figures was bewildering, as it showed counter-intuitive trends. Subbarao said during the peak of the financial crisis, IIP, based on the previous series, was positive. This was contrary to the central bank’s assessment of the underlying trend of deceleration. "The new IIP series, with 2004/05 as the base year, now shows IIP growth was, in fact, negative during that period, vindicating our intuition," Subbarao said.

“Another problem with IIP has been its volatility, with the volatility being even larger in the capital goods sector. This is analytically bewildering. The volatility persists in new series too,” he said.

The IIP data has also contributed to RBI’s under-projection of inflation in the last financial year. The central bank has been criticised for its projections on inflation, since the headline number has consistently been above the estimates since last year. Inflation remained much higher than RBI’s comfort zone last year, though till January, the central bank continued to project March inflation at six per cent. RBI revised its inflation target to eight per cent for March-end during its mid quarter policy review, while March-end inflation figure stood at 9.68 per cent.

Apart from a higher-than-expected rise in crude oil prices and a below-expected decline in food prices, erroneous signals from IIP data and a higher-than-usual upward revision of past inflation data also contributed to RBI’s under-projection of inflation, Subbarao said. “In this context, persistently high inflation during 2010-11 and the continuation of this trend through the first half of 2011-12 suggest we need to revisit our estimates of the potential growth rate of the economy,” he said.

The central bank has been left guessing on the likely revision in the provisional inflation number while assessing inflation. “The more critical data on wholesale price index inflation, too, has been subject to large revisions,” he said. “Often, it is not clear if the revisions are occasioned by one-off factors or systemic factors,” he said.