- According to author, retail inflation in India is overestimated.
We are losing credibility
- Prominent Western experts have stated that Indian GDP growth is overstated, and maybe by as much as 250 basis points for 2015-16.
- That is, instead of being 7.6 per cent, it “likely” to be close to 5 per cent.
- Indian GDP is low, because deflator is underestimated, while the real indicator of inflation in the economy, the consumer price index (CPI), is rising at around 5 per cent, if it is correctly measured, it should be running at a 3.8 per cent.
What is wrong with the estimation?
- The CPI is based on price surveys conducted every month.
- There is no problem with the CPI data on prices but it has got the expenditure weights wrong.
- These weights are obtained from the National Sample Survey of Consumer Expenditures, 2011-12.
- Unfortunately, the NSS surveys have strangely and mysteriously been under-estimating the average per capita consumption for three decades now.
- To make the point of flawed weights clearer, consider the difference between consumption data as per NSS and National Accounts data
|Expenditure of a typical Indian Consumer on:-||NSS (% of total monthly expenditure)||NA (% of total monthly expenditure)|
|Food and beverages||46||31.4|
|Household goods and services||3.7||6.3|
|Transport and Communication||8.6||16.8|
Missing the Picture
- Clearly, there is a large difference in the shares. More importantly, the CPI data also completely misses out on an increasingly significant part of each consumer’s life — the financial and insurance services (zero in CPI and 7.2 percent in NA).
- The GDP in India is (approximately) composed of 65 per cent consumption and 35 per cent investment.
- If one gets appropriate deflators for the two components, one can obtain an independent assessment of what deflator inflation looks like in India, and an estimate that does not erroneously use WPI prices for consumption expenditures (as pointed out by the RBI).
- By definition, one should use the consumption weights as in the NA.
- The difference in inflation estimates are not small.
- If the adjusted CPI estimates do reflect the underlying reality of consumer inflation, then the results have strong implications for the RBI policy (are Indian repo rates too high?) and the GDP growth (are we underestimating the GDP deflator inflation?)