Data deficiency

MPC will have to work with an incomplete inflation picture

The spread of Covid-19 and the nationwide lockdown are posing unprecedented policy challenges. While the government is working on economic measures to contain the pandemic pain in different sectors of the economy, the epidemic is increasing complications in macroeconomic management. For instance, the government this week released the data only for some of the sub-groups of the consumer price index (CPI) because of difficulties in collection. With shops and markets closed, field officers worked remotely and collected information on the telephone in April for the consumer price index, raising concern on data accuracy. Price data is normally collected from 1,114 urban markets and 1,181 villages across the country. This is done through personal visits by field officials, but work was suspended in March because of the pandemic. As a result, the general CPI and indices for different states and Union territories could not be compiled for April. Although the sub-groups for which data is available shows an uptick, a clear picture of inflation condition is not available for the month. Inflation for March has been revised lower to 5.84 per cent from 5.91 per cent. 

That means the Monetary Policy Committee (MPC) of the Reserve Bank of India will not have the most critical element required for decision-making when it begins its meeting on June 3 to review the policy. In the March meeting of the rate-setting committee, Chetan Ghate, one of the members, had said: “Once the Covid-19 pandemic subsides, is there likely to be a quick return to normal? I am hopeful because production capacity has not been destroyed. However, I will watch the incoming growth-inflation data carefully, and remain data dependent.” But data will remain a problem, at least for some time since restrictions on movement are likely to continue in the foreseeable future. It would be interesting to see how the MPC makes the rate decision. The pandemic has led to simultaneous demand and supply shocks, and the April inflation data could have helped understand the situation. Aside from dealing with an incomplete inflation picture, the MPC will also need to judge the effect of liquidity and fiscal measures on inflation outcomes in the coming quarters. The macroeconomic condition has changed dramatically since the last meeting of the MPC. As some of the high-frequency indicators suggest, output virtually collapsed in April and recovery is likely to be only gradual. The decline in economic activity requires policy support. But how the MPC envisions medium-term inflation outcomes in the absence of full information would determine the scope of policy support. 

The problem is not limited to the official data collection machinery. The Centre for Monitoring Indian Economy, for instance, is also working with a significantly smaller sample for its employment survey. At a broader level, as reported by this newspaper, the Indian statistical system was facing significant hurdles in collecting data for various surveys even before the outbreak of Covid-19 due to the Citizenship (Amendment) Act-related tensions. The economic dislocation caused by Covid-19 has just added another layer of complexity. On Thursday, the government released only price movements of select sub-groups for the wholesale price index. The inflation figures for manufactured products, which have a combined weighting of over 64 per cent in the index, could not be released, giving an indication of the exceptional problem that policymakers now face.