New Delhi: Deregulation of fuel prices will dampen inflation in the medium term, says chief statistician of India T.C.A. Anant. In an interview, Anant, who was appointed to the post in June, spoke on the state of the economy and the problems with India’s statistical system, and ruled out the need to replace the Wholesale Price Index (WPI) with the Consumer Price Index (CPI) as the country’s main inflation barometer. Edited excerpts:
How do you see the growth scenario in the country? Is 8.5% GDP (gross domestic product) growth achievable? The International Monetary Fund is projecting around 9.5%.
If you look at all the indicators, 8.5% seems to be on target. Whether more than 8.5% is feasible or not is difficult to say at this moment. I will only be comfortable to answer that around October or November when I have a sense of what can be expected from agriculture growth. In the medium term, one can be reasonably bullish about growth prospects. In the longer run, beyond two-three years, the basic constraints to growth have not gone away, which are infrastructure and skilled manpower...
On the inflation front, how do you see the trend from here?
I have always been not so pessimistic on inflation. The reason is I view inflation primarily as an expectational phenomenon. If you look at the macroeconomic position as it exists, both in its global setting as well as in its domestic policy front, there are (a) number of indicators to suggest that we are reasonably well-managed.
Our deficits have been high but not out of control and there is enough evidence the government has been doing a reasonable job of bringing it down. The growth in physical production is good and even though there are constraints in long-term growth, which need to be addressed, they don’t seem to be posing severe medium-term bottlenecks. Thirdly, the international price scenario is comfortable.
In all of this the only reason you will get short-run spikes in domestic prices are because of some temporary mismatch between demand and supply and some amount of temporary domestic expectational problems. I do not see this as...sustainable (in the long run). This is not like the position that was there in the ’70s, when there was a global expectational inflation happening. That has been effectively finished over the last 15 years.
Under the circumstances, given the fact that there is global excess capacity and recession still not finished, I see the prospects of major inflationary situation emerging in India as dim.
How do you explain the lack of public outrage on the issue. Is it because consumption and income levels have gone up significantly?
...First of all, outrage in any society is a middle-class phenomenon. (A) Very large source of the ’70s agitation was by public employees. Their income is now fully protected by linking it to inflation, which was not the case in the ’70s.
There is an impact on people who are not able to generate the outrage, that is the community outside the middle class. That is being documented by our own statistics, which show there is a core community in India where we have not been successfully able to address problems of malnutrition and hunger. We have bought a measure of social peace by insulating the middle class.
With the proposed decontrol of fuel prices, how do you see it impacting inflation in the country?
I think in the medium term it will be dampening on inflation. If the government links prices of major petroleum products to international prices, two things will happen. One, you will allow people to make substitutions more easily when international prices rise. And if there is a general expectation that in the long run petroleum prices will rise, this will enable swifter technological adaptation domestically to long run higher fuel costs.
Secondly, by removing a major pressure on deficits, you will be dampening its impact on inflation. People will substitute away from expensive fuel to cleaner technology to the use of other methods of transportation, the pressure to do that will happen.
What are the challenges you face as the chief statistician of India?
In terms of what the job requires one to do, it is an interesting job, because statistics is principally the eyes and ears of the government. The problem is our statistical infrastructure has not kept pace with the requirements of modern governance. If you look at what has happened over the last two decades, there is enormous growth in communication. Media nowadays expects answers very quickly. So we need to strengthen our statistical infrastructure at the central level and most importantly at the state and at the level of Panchayati Raj institutions.
This poses huge challenges to us both (in) short term as well as (in) long term. The long-term challenge is increasing availability of candidates who are numerically sound. The shorter run problem is the fact that we face huge shortages in personnel. These shortages have to be met through partly training people who are available and better use of technology through substitutes for people...
Then we face demands because the nature of governance has changed. So there is an expectation that we would deliver quality results quickly and in a whole range of areas...
Our assessment of income is through a consumption survey. But since the National Council of Applied Economic Research (NCAER) came out with its income survey, there is a debate on whether the government should do the same. A committee under NCAER chairman Suman Bery is looking into this matter. What is your view?
There is (a) committee in National Statistical Commission and Dr Suman Bery is looking at it. I do not want to prejudge their answer. I am now not speaking as the CSI but as an economist. The problem is, what we mean by income is very complex. I can measure consumption, I can measure addition to assets and therefore savings. But to go from that to the economist’s notion of income is complex.
Then you will get into issues of permanent income, lifetime income, which are extremely nebulous and hard to pin down. These are also linked to the notion (of) how good your capital markets are, how much are certain types of endowments and assets convertible into income. So what does it actually mean at a point of time is very slippery. My recollection is that what Professor Bery has been asked to do is to look at the prospect of better estimating savings.
There is another debate on whether we should release the inflation index on the basis of the seasonally adjusted data.
There are two positions. One is the statistician’s view: That our job is to put out the numbers. We should not do any adjustment to it. We should simply tell you the numbers. We should collect the numbers according to the best procedure, so that we give you the most credible and highest quality number. It is up to the user to calculate the rates...
But as an economist what do you think?
As an economist I think you should report seasonally adjusted inflation. Because the problem with the year-on-year and month-to-month comparisons is they ignore the seasonal factors. You actually do not know what is the underlying true rate of inflation. There is a cyclical pattern in prices. Correct thing is to actually adjust for the seasonality in prices and then look at what is happening. But we should not do it. That is very clear...
Your ministry is working on two consumer price indices for rural and urban India with the target to merge them for the CPI-National. Do see the national CPI ever replacing WPI as India’s headline inflation index?
...There are actually three notions of inflation you can think about. One is inflation as in the quantity theory of money (money supply has a direct, positive relationship with the price level) that inflation is related to the value of the basic transactional base of the economy. This number is critical because it tells you how much you should manage the liquidity situation in the economy. The closest index that comes to this index is the WPI.
Then there is the cost of living inflation... captured through a consumer price index. The third is inflation as it measures the contracts and costs, sometimes called the producers price index (PPI).
I have long argued that we should go for a basket of indices...If you have a basket released on a common time frame, there will be no need for a headline index in that sense. When you talk about RBI (Reserve Bank of India) policy, you look at one (WPI), when you talk about effect on consumer you look at another (CPI) and when you talk about what is happening to profitability, you look at the third (PPI). That recommendation is there in the report of the expert group on WPI (headed by Abhijit Sen). The thing is to actually make that happen.
But globally most countries use CPI as the standard headline inflation index.
It would be wrong for the monetary authority to link monetary policy to a CPI index because monetary policy is basically rooted in the quantity theory of money. So the index for RBI will continue to be a proxy of the WPI. Most advanced countries have a basket of rates and no central bank mechanically targets only one.