Data-dependent policy

Consumption survey will fill important gaps

The Indian economy was slowing even before the pandemic disrupted activity across the board. Although it is now recovering from the pandemic-induced disruption, employment and income have been severely affected over the past two years. The fact that India’s fiscal intervention during the pandemic was also limited compared to some of the other large economies, the disruption is likely to have affected consumption significantly. The distribution of free foodgrain, however, was a vital intervention that helped a large number of households. The state of household consumption would be known only after the results of a new consumer expenditure survey, reported to start in July, are available.

The government has done well to restart the process because the survey is critical for understanding the functioning of the Indian economy. Two recent papers — one published by the World Bank and the other by the International Monetary Fund — assessed the level of poverty in India. Though they are not strictly comparable, they concluded that poverty in India had declined considerably in recent years. Economists had to adopt different methods to gauge the level of poverty because of the lack of more recent, official consumption data. The government had decided to scrap the consumer expenditure survey conducted in 2017-18 because of data quality issues. A fresh survey could not be conducted thereafter because of the outbreak of the pandemic. But now that the pandemic is under control, the government has decided to restart this critical survey. Given the importance of the survey and the experience with the previous one, the statistics department would be well advised to explain to all stakeholders the kind of changes being adopted. A wider evaluation of the methodology and changes adopted would make the process more transparent and the outcome more credible. The department can also benefit from suggestions in the process.

The outcome of the survey would be critical for not only gauging the level of consumption but also revising the base for gross domestic product estimates and the consumer price index. It is possible that the outcome may necessitate significant changes in the way other macro indicators are arrived at. For instance, it has been argued that with a growing economy, the consumption basket of Indian households has changed significantly over the last 10 years. It is possible that the weighting of food in the consumption basket has declined and the expenditure on services has increased. Since the headline consumer price index-based inflation rate is the nominal anchor for monetary policy, it is important that the index reflects the true picture. If the index remains outdated for a long time or does not reflect the actual state, inappropriate monetary policy changes could affect output and create longer-term imbalances.

At a broader level, it is worth reiterating that the importance of timely collection and dissemination of data cannot be overstated in a rapidly changing economic environment. It is perhaps the most powerful tool to guide policy interventions. Now that the government is restarting the survey, it should also aim to fill the gaps in data collection. For instance, as argued in this space recently, India needs a new producer price index. It is important to measure output, consumption, and price changes more accurately to ensure higher growth with macroeconomic stability.