India Data Dearth Roils Investors as RBI Gathers Own Figures

RBI Governor Duvvuri Subbarao
Duvvuri Subbarao, governor of the Reserve Bank of India (RBI). Photographer: Dhiraj Singh/Bloomberg

Mumbai housewife Sangita Shinde sought work in a shopping mall last year to help pay her children’s soaring school fees. Don’t expect to find that jump in living costs reflected in India’s inflation data.

“I was forced to take up a job,” said Shinde, 35, as she oversaw cleaning at a retail complex in India’s financial center. “It’s so difficult to meet rising expenses.”

What Shinde and millions of others have to cope with every day is hidden from investors and central bank Governor Duvvuri Subbarao when it comes to gauging India’s economy, because official data are often incomplete or months out of date. The statistical fog spurred the central bank to collect its own price data to supplement the benchmark wholesale-price index, which excludes services including education that make up 57 percent of gross domestic product.

“To a large extent, the Reserve Bank of India is essentially making decisions in the dark,” said Jahangir Aziz, India chief economist at JPMorgan Chase & Co. in Washington and a former adviser at the nation’s Finance Ministry. “There is no doubt about it that India lacks a solid, good measure of inflation. There has to be much broader coverage of services.”

What Subbarao can deduce about price pressures left him holding off on lowering the benchmark interest rate yesterday and opting to reduce lenders’ reserve requirements instead. He said at a press briefing in Mumbai that the central bank must not lose sight of its inflation goals, adding the “stickiness” of price increases is a main concern.

Patchy Data

While Shinde says school fees have doubled in the past five years, the wholesale index shows inflation in Asia’s third-biggest economy averaged 7.3 percent since September 2007. The gauge conflates retail and producer prices, and fails to reflect services, Subbarao said July 17. In contrast, economies from Indonesia to the European Union and the U.S. include services such as education in inflation measures.

The Reserve Bank now collects prices for items such as food grains and lentils to capture variations across the country, it said last month.

Labor-market data are also patchy -- the most recent jobless estimate is at least four months old. The reliability of the official 3.8 percent unemployment-rate estimate is clouded by being based on a sample of about 0.05 percent of Indian households.

“It’s almost unthinkable for the central bank to make policies without knowing unemployment,” said Aziz, who previously worked at the International Monetary Fund. “If I don’t even know the demand side of the economy, how can I do demand management?”

‘Uncertain Past’

Less than a year after becoming governor in September 2008, Subbarao said that while “most economies have to contend with an uncertain future, here, in India, we are having to contend with an uncertain past as well,” citing more frequent data revisions than elsewhere.

Subbarao’s point was underscored this year with an inflation report that might have affected the Reserve Bank’s April 17 decision to lower interest rates for the first time since 2009. The half-percentage-point cut in the benchmark repurchase rate came a day after a release showing wholesale-price inflation had eased to 6.89 percent in March, signaling more scope for monetary stimulus.

Weeks later, revisions showed inflation had accelerated to 7.69 percent that month, the second-fastest for the year so far, pulling away from Subbarao’s comfort level of about 5 percent and casting doubt on the judgment to reduce borrowing costs.

Defending Decisions

“If the true extent of inflation was known to the central bank, they probably wouldn’t have gone for such an aggressive action,” said Rupa Rege Nitsure, an economist at state-owned Bank of Baroda in Mumbai.

Subbarao defended the rate cut when asked whether he had any regret on a conference call with analysts on Aug. 1, saying that the move was the “best decision based on the situation at that time.”

While peers in the Group of 20 major economies rely on consumer inflation as their main gauge, India only began publishing a comprehensive, year-on-year measure of such prices in February.

The late introduction shows how the nation’s data system has struggled to keep up since Prime Minister Manmohan Singh began modernizing the economy two decades ago as finance minister, cutting import and investment barriers.

“The nature of the economy has changed at a very fast pace and some of our systems are still old,” said Ashish Kumar, who’s in charge of compiling gross domestic product figures at the government’s Central Statistical Office.

Buffeting Investments

The agency relies on information from India’s 28 states and seven union territories, and such reports can be very delayed or revised, he said.

Revisions to economic figures also buffet Indian investments. The government on April 12 slashed its estimate of January year-on-year industrial production growth to 1.1 percent from 6.8 percent, blaming an error in sugar output calculations. Benchmark bonds rallied the most in more than two months that day on speculation the central bank would cut rates.

Equities surged on Feb. 14, 2011, with the BSE India Sensitive Index rising 2.7 percent, aided by a government report that inflation had cooled in January. Two months later, the index slid the most in seven weeks when officials revised the inflation rate up by more than 1 percentage point, to almost 9.5 percent.

“Huge data revisions lead to improper asset allocation by investors and cause unnecessary market volatility,” said Mumbai-based Ganti N. Murthy, who oversees about $981 million as head of fixed-income investments at Peerless Funds Management Co.

Inflation Maze

The country’s economic data are “adequate for surveillance, but weaknesses remain in the timeliness and coverage of certain statistical series,” the IMF said in a report in April.

Subbarao has refrained from further lowering the benchmark rate even as counterparts from Asia to Europe eased policy to address rising global economic risks. Price increases, stoked by food costs, supply bottlenecks and a 9.7 percent drop in the rupee against the dollar in the past year, have sapped growth.

The currency strengthened 0.1 percent to 53.925 per dollar as of 1:46 p.m. in Mumbai, while the benchmark BSE India Sensitive Index of stocks rose 0.3 percent.

Growth Puzzle

Indian inflation based on wholesale prices was 7.81 percent in September, the fastest in the BRIC group that also includes Brazil, Russia and China. Using the new consumer-price index, it was 9.73 percent, the highest in the G-20 after Argentina, which the IMF has put on notice to address concerns about the quality of its data.

There are six further Indian inflation gauges, and Subbarao says he analyzes them all to set policy. They include a central bank in-house core inflation index that excludes food and fuel costs.

Measuring growth in India’s $1.8 trillion economy is also tricky: an Aug. 31 report showed it both accelerated and slowed.

GDP rose 5.5 percent in the three months through June from a year earlier, near the three-year low of 5.3 percent in the previous quarter, using assessments of output from industries.

An alternative estimate based on spending on goods and services shows a slowdown to 3.9 percent, according to calculations by Bloomberg using data in the release.

Subbarao flagged discrepancies in GDP reports in July 2011 and said policy choices can turn out to be “sub-optimal” if they use inaccurate provisional estimates.

RBI’s Efforts

The Indian economy will expand 4.9 percent this year, the slowest pace in a decade, according to IMF projections. Prime Minister Singh is trying to boost confidence in the nation’s ability to return to 8 percent growth.

The Reserve Bank under Subbarao has stepped up efforts to fill information gaps. Aside from gathering its own price data, the bank started a consumer confidence survey in 2010 and introduced a house-price index for Mumbai, the financial capital, in 2009, that was later extended to eight more cities.

It also surveys inflation expectations and compiles a composite leading indicator for the economy.

India isn’t alone in suffering data failings. In China, Vice Premier Li Keqiang, then a regional Communist Party head, said in 2007 that the figures going into the country’s GDP are “man-made” and “for reference only,” according to a diplomatic cable published by Wikileaks in 2010.

Falling Short

The deficiencies in India are worse than a number of regional peers, said Rahul Bajoria, an economist at Barclays Plc in Singapore.

“India’s data does fall short on many benchmarks as compared to other nations in the region,” he said. “If you are not able to take the data completely at the face value, you have to be ready that you may make some mistakes.”

While the new consumer-price gauge is a step in the right direction, its limited history makes it unsuitable as a sole headline measure of inflation, Subbarao said in July.

For Shinde and other consumers, sacrifices are needed to cope with the increasing cost of living. Since July, she’s stopped taking taxis to work, and now joins millions of commuters taking Mumbai’s packed trains into the city, jostling in carriages so crowded that passengers cling to the roofs and hang out of doorways.

“With rising school fees, transportation costs and house rent, life is becoming quite a struggle,” she said.

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