Analysts such as Morgan Stanley’s Ruchir Sharma question the credibility of official data, pointing to a dichotomy between GDP growth numbers and corporate performance. Others say falling industrial output doesn’t add up with rising inflation. What would you say to them?
The Index of Industrial Production or IIP is and has always been a volatile series. To correlate it on a month-on-month basis with inflation is not statistically desirable or advisable. The IIP monthly data faces a number of sources of volatility which include seasonal factors and includes in the context of India, a complicated seasonal, but not regularly predictable set of holidays. For example, Dussehra and Diwali occur every year, but in a band of 30 to 45 days. There are other regionally significant festivals some of whom are very predictable in there timing while others are not.
This complicates the volatility in Indian industrial data, which needs to be appreciated when you work with disaggregated monthly data. Remember this volatility is missing if you work with the annual data. But when you come down to the monthly level, a very large number of commentators are oblivious to this.
What about inflation?
The two major indicators of price movement — consumer price index (CPI) and wholesale price index (WPI) — cover very different baskets of commodities with different weightages. People talk about a discrepancy between CPI and WPI. If looked at carefully on a common set of commodities, the two indicators behave similarly. It’s not that something is being done differently in the WPI, but different commodities are behaving differently. This is a reality – all commodities are not experiencing the same form of price movement today, unlike in the past when there was generalised inflation and every commodity was seeing a rise in prices, albeit at different rates. We are now seeing a situation where some commodities are seeing a fall in prices, while some are seeing a rise. That is captured based on whether they enter the consumption basket or not. This complexity in price movement needs to be understood for its implications on what it says about the economy and what does it say about incentives to different segments of the economy. It is not a problem with the data. It is a problem that the analyst needs to get lot more sophisticated in their analysis.
How do you see global turmoil impacting India’s growth?
I don’t want to give a simple answer to a complex issue. Like everybody else, global slowdowns affect us. But what we have going for us is a large domestic economy and internal market with huge potential to address our market from internal resources. India is a large economy and our demand is not only capable of changing our own growth rates, but also influencing global growth rate.
Virtually anyone who analyses India points out that it has the scope and the potential to be the next world leader. To take a line that the global economy is poor and slowing and therefore, India doesn’t have a choice or chance – is simply not possible. Our own internal growth potential is very strong. What is our growth potential? A lot of people answer this by analysing past statistics. What you are not capturing is our possibility which exists because of the development gap in a large part of the country. If you were to factor that in, our growth potential is actually quite high. We are capable of delivering much higher growth rates going ahead.
Does food inflation remain a concern?
Yes, it is high both in CPI and WPI, with pulses staying particularly high. There are seasonal elements in food prices where average supply and demand are close. Then there are commodities like pulses in which there has been a secular gap between domestic production and demand.
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