A fresh start: Base revision will better inform policy decisions

Several crucial economic indicators that inform policy decisions are set for a comprehensive overhaul. As reported in this newspaper and elsewhere, the Union government’s statistics department is working on new series for the consumer price index (CPI), index of industrial production (IIP), and gross domestic product (GDP), which are likely to be released next year. For a rapidly developing economy like India, it is extremely important that key indices are regularly revised and adjusted. Revision in recent years was delayed partly because of the pandemic and the long gap between household consumption expenditure surveys. As a report in this newspaper on Wednesday showed, the government is now planning to undertake household consumption surveys more frequently, which must be welcomed. The base for the current GDP series, for instance, is 2011-12. For context, the Indian economy’s size in 2025 is expected to be about 2.3 times in dollar terms than it was in 2011. India has changed significantly since the last revisions, and it is likely that key indices are not reflecting the actual picture of the economy.

 

The expected revision will not only change the base year but also include new data sources, which should help make these indices more robust. The new CPI, for instance, will reflect price data from about 2,900 physical markets, as against 2,300 in the present series. The Ministry of Statistics and Programme Implementation will also collect online data from 12 cities to account for the changes in the ecommerce space. Although ecommerce now has significant reach in urban India and some parts of rural India, its adoption among consumers will only grow as the country urbanises. It was reported earlier this year that the government was evaluating the possibility of a separate ecommerce index, aimed at tracking household consumption through this medium. It will be well advised to construct such an index. Depending on the depth and the coverage, it will provide important information such as consumption patterns and shifts in demand. In fact, following the ecommerce space closely could also enrich the GDP data. A monthly release of such an index could serve as an important lead indicator for the economy. Furthermore, as reports suggest, the GDP estimates in the new series will incorporate data from the Goods and Services Tax Network and the National Payments Corporation of India. These sources were not available during the previous base revision.

 

The importance of accurate data for both policymaking and decision-making in the private sector cannot be overstated. For instance, based on the latest consumption data, some economists have argued that the weighting of food could drop significantly in the CPI. The composition within the food basket may also change in favour of perishables. All this will influence the headline inflation rate in different ways, with implications for monetary policy. For the inflation-targeting framework to be effective and useful, it is important that the data is accurate and reflects the actual position on the ground. Nevertheless, the upcoming revision could still be hampered by the fact that survey data is still based on samples drawn from the 2011 Census. In the context of GDP data, the ministry should also aim to address some of the criticisms of the present series. One such critique is that of the conversion of nominal to real GDP. In this regard, it is worth noting that India also needs a producer price index to address such issues. Although there have been reports of such an index being contemplated, it is unclear whether it will be ready and used in the new series.