CPI a lousy measure for monetary policy-making: Pronab Sen

Oct 11 2013, 11:23 IST
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SummaryFormer chief statistician talks about debate over the right inflation gauge for monetary policy formulation.

compression at the retail level.

Q: Is there a need to fine-tune the CPI data?

Not much.

Q: Coming to the index of industrial production (IIP), we see a higher degree of volatility in recent years, especially for capital goods. This is posing a challenge to the government and RBI in framing policies. What's your take on this?

Volatility has been there in the IIP all along. Let me give you an example. When a company supplies a boiler after four months, the month when it is delivered shows a spike in the capital goods index. Now you can't have a situation when the boiler is delivered in bits and pieces over those four months. Even take the example of electric cables where the orders come in for thousands of kilometres. In the month these cables are delivered, the index will show a sudden jump and when they are being manufactured, you don't see them getting reflected in the index.

Also, people keep missing out on things. When we changed the IIP base to 2004-05, we dropped the small scale industries, which comprised 40% of industrial production. Earlier, you had a situation when the IIP was coming out with just 20% responses. That was ridiculous. You had a comprehensive index and bad data. Now, the IIP is only for the corporate sector and does not cover SSIs. Now we get 65% of the response in the first estimate and 90% in the first revision of the monthly IIP. So we now have a partial index with good data. The problem is that people forget this partial coverage (when they speak of volatility).

Q: But in the absence of SSIs, won't the IIP show an incomplete picture?

The assumption is that SSIs behave identically with big companies. Over the long term, this is correct. But there are also times when they move in opposite directions. My sense is that at present that is the case. An Indian SSI is typically a single-market entity -- it either caters for the domestic market or exports; there are very few SSIs that cater to both the sectors as bigger companies do. Most SSIs cater for the domestic market and except for FMCG items, most of the rural demand is met by SSIs. My estimate is that SSIs have done a lot better in the past few months. Although this is not reflected

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