India inflation consistently tough to pin down

September 4, 2012

High inflation is a drag on economic growth in the world’s second most populous country and matters immensely to over 400 million people, or over a third of India’s total population, who struggle to earn enough to feed their families three meals a day.

The particularly volatile nature of inflation in India has confounded policymakers and small business owners and has left economists, who are often running complex statistical models based on a dearth of reliable data, with a poor forecasting record.

To be fair, predicting economic data can be pretty tough in a country where collecting and reporting national statistics is still in its infancy stage. Provisional numbers are often completely revised away.

The latest sharp revisions to historic gross domestic product data, which show that India’s economic performance during the aftermath of the global financial crisis was worse than previously thought, is just one recent example.

Economists have underestimated the pace of monthly wholesale inflation 17 times over the past two years, according to an analysis of Reuters polls.

The surprise drop in July inflation to 6.87 percent reported last month was only the sixth time during that period it has undercut the consensus.

Food prices, which are always volatile, are the main culprit.

Despite accounting for less than one-sixth of the wholesale price index, wild swings in food prices have a bigger impact than the larger manufacturing component, which includes the prices of chemical and metal products.

Gauging inflation also has become harder since the Office of the Economic Advisor abruptly stopped releasing weekly statistics on food prices in February, offering no explanation.

Jyotinder Kaur, economist at HDFC Bank in Gurgaon, just outside of New Delhi, said:

When you are using statistical tools for this purpose, you run into trouble because you don’t have a long enough time series. What you are really going with is gut instinct.

At a family-run eatery in a residential suburb of Bangalore, Padma Jallipatti has also been doing her best to predict where food prices will go, but without a fancy statistical model.

Despite pencilling in room for price rises for staple ingredients, no amount of budgeting has helped her and the restaurant, which had to downsize its menu to do away with a couple of vegetable curries that were too expensive to make.

Jallipatti, whose eight-member family’s only source of income is the restaurant, said:

We aren’t able to handle the costs of running the business. It’s getting harder by the day, but once you get in, once you start a business, it’s tough to get out of it.

To make matters worse for other small business owners like Jallipatti, India is facing its first drought in three years.

The last one triggered a big spike in food prices, pushing inflation well above 10 percent. The following year, the Reserve Bank of India started an aggressive series of 13 interest rate hikes through October 2011, which strangulated growth but did little to control high-strung inflation.

For now, though, the RBI has transferred the responsibility for taming food prices onto a government going into parliamentary elections that has struggled to enforce new measures and remove supply bottlenecks that are pushing prices up.

In the meantime, all Indians, whether or not they’re equipped with statistical models, will have to keep trying to make their best guess and then make the best of it.

 

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