Duvvuri Subbarao: Statistics and statistical analysis at the Reserve Bank
of India
Inaugural address by Dr Duvvuri Subbarao, Governor of the Reserve Bank of India, at the
third Annual Statistics Day Conference of the Reserve Bank of India, Mumbai, 2 July 2009.
* * *
I am delighted to be here today to inaugurate this third Annual Statistics Day Conference of
the Reserve Bank. It has now become a tradition for us to mark the Statistics Day as a tribute
to late Professor P.C. Mahalanobis and his colossal contribution to the development of
statistics in India, both as an academic discipline and as a tool for public policy. The
Mahalanobis model of development planning, based as it was on statistical data analysis,
marked an important milestone in India's development history. The large-scale sample
survey techniques, as practised today, owe their foundation to the pioneering work done by
Prof. Mahalanobis. The Reserve Bank is happy to honour the memory of Prof. Mahalanobis
on this Statistics Day.
This year's Statistics Day is important for another reason. It is a part of the several learning
events we are planning over the course of 2009-10 to mark the Reserve Bank's Platinum
Jubilee. I have no doubt that improving our understanding of statistical analysis and learning
of the best practices in this area will help the Reserve Bank deliver on its mandate much
better.
We are privileged to have a person of the eminence of Prof. T.N. Srinivasan at this year's
Statistics Day. Prof. Srinivasan, currently the Samuel C. Park Jr., Professor of Economics at
Yale, has very distinguished academic credentials and is acknowledged as one of the
leading authorities in the world on trade and development. A significant amount of his work
has involved statistical analysis, and we look forward to learning from his scholarship and his
analytical insights during this Conference.
I also want to take this opportunity to acknowledge three of our special guests. Prof. J. K.
Ghosh, presently a professor of statistics at Purdue University, was formerly the Director of
the Indian Statistical Institute. He is a world renowned authority on Bayesian statistics. Prof.
Arijit Chaudhuri of the Indian Statistical Institute is among the foremost experts in surveys.
Prof. Chaudhuri extended the scope of survey methodologies in the area of multi-stage
sampling, designing complex surveys, randomized response surveys and small area
estimation. Finally, and importantly, we have with us Dr. Wilbert van der Klaauw, Assistant
Vice President of the Federal Reserve Bank, New York. Dr. Klaauw is heading the Fed's
project team on inflation expectations, an area of keen interest, and may I add, perplexing
challenge, to central banks around the world.
Once again, a very warm welcome to all of you to this Annual Conference.
Three challenges
Statistics and statistical analysis are central to a lot of what we do in the Reserve Bank.
Many of the decisions that we have to make and judgments that we have to form are based
on analysis and interpretation of data. Quite evidently, we are often plagued by incomplete,
inconsistent or non-timely data. All of inductive learning is a progression along the intellectual
hierarchy - from data to information to knowledge to wisdom. The relevance and
effectiveness of our policy judgments, therefore, depend crucially on the quality of data and
the efficacy of analysis and interpretation. It is important, therefore, for public policy
institutions like the Reserve Bank of India, to focus on statistics and statistical analysis. To
give this task a specific focus, I would like to highlight three challenges in the area of
statistical analysis and interpretation that this Conference can address.
First, what are the gaps in the official data and data analysis and how do we bridge them?
The quality of data that various official agencies, both in India and abroad, collect depends
critically upon the completeness and accuracy of the responses. Significant non-responses
and time-varying pattern of responses can provide misleading information and result in
suboptimal policy responses. But, how do we get credible and complete data, and that too in
good time? In a liberalised economic environment, it is no longer possible to mandate
submission of data or responses to surveys by official fiat or regulatory prescription. Also,
with globalisation, it is becoming increasingly difficult to get credible and timely information
on cross-border flow of goods, services and capital. The first challenge, therefore, is what
steps do the official data agencies need to take to ensure that data are comprehensive,
consistent and timely?
Second, our official statistical agencies have made several efforts to improve the collection
and dissemination of statistics. Yet, there is scope for significant improvement in, for
example, the construction of WPI or IIP, where the coverage baskets have to be more
representative of target populations. Given the fast pace of changes in the structure of the
economy in the face of deregulation, liberalisation, and competitive forces, it is important that
the various indices such as WPI or IIP, which attempt to capture the underlying
developments in the economy, are refined and updated on a continuous basis to provide
timely information to the policymakers.
Third, in the context of more open economies and improvements in communication, market
dynamics have become sensitive to data releases and information dissemination. All of us
are aware of how market participants oftentimes misinterpret information, triggering
considerable volatility in markets. We can help manage expectations and perceptions better
by focussing attention on data standards as well as improving the quality of our statistics
education. This is the third challenge.
I hope this Conference will come up with some specific thoughts on how we may address
these above challenges.
Statistical surveys done by RBI
Since this seminar is focussed more narrowly on statistical surveys, let me briefly comment
on the surveys done by the Reserve Bank. We do regular periodical surveys as well as
needbased ad hoc surveys. Our surveys in the external sector cover foreign liabilities and assets,
software exports and non-resident deposits, etc. In the banking sector, the surveys cover
distribution of credit and deposits, composition and ownership of deposits, international
banking statistics, and the like. In the corporate sector, the survey of performance of private
corporate business sector, conducted since 1951-52, has been of considerable interest to
analysts.
The Reserve Bank has also introduced several new surveys to support monetary policy
formulation. These include the industrial outlook survey, inflation expectations survey for
households, survey of inventories, order books and capacity utilization and survey of
professional forecasters.
We are also working on a survey for housing start ups. The biggest challenge for us here has
been collecting information from each state/city on building permits and coming up with a
reliable matrix of house-start coefficients. The special value of these new surveys is that they
include information from key actors, they are forward-looking and the results are available in
quick time. Such survey results provide useful and timely inputs for the conduct of
forwardlooking macro-policies.
Statistics in the RBI's work
At the Reserve Bank, honing our skills and improving our database is a constant endeavour.
We have achieved some satisfactory progress, but there are daunting challenges still. Let me
illustrate by giving five problems that we confront in the area of data analysis.
(i) Data revisions
Measuring the economy remains a complex task and data uncertainty is a fact of life. Data
revisions are a legitimate part of statistical compilation and dissemination. However, here in
India, data revisions and systemic biases in data revisions are more frequent and common
place. Most economies have to contend with an uncertain future; here, in India, we are
having to contend with an uncertain past as well. This uncertainty poses a challenge for all
economic policy, particularly for monetary policy, where we have to look ahead by looking
back. Monetary policy transmission in developing economies such as ours is inhibited by
structural factors and this vulnerability is exacerbated by the uncertain information context.
The conduct of monetary policy will be better served by more firm data and less revisions.
How do we ensure that?
(ii) Inflation measurement
Price stability, defined as low and stable inflation, is a key objective of our monetary policy in
India. In the context of our multiple objectives, inflation containment emerged as a primary
concern of the Reserve Bank during the period 2006-08 - initially in the context of domestic
demand pressures, which in 2008, were augmented by globally-induced supply shocks.
Preemptive monetary measures, in conjunction with fiscal and other supply-side measures,
helped to contain inflation and inflation expectations. Since the second half of 2008-09,
domestic inflationary pressures, as measured by wholesale price index (WPI) inflation, have
eased on the back of sharp correction in international oil and other commodity prices. In the
context of the sharp decline in headline WPI inflation, there have been calls for reduction in
the policy rate and the overall domestic interest rate structure. While policy rates have indeed
been lowered and bank deposit and lending rates have also come down, albeit not to the
same extent, it needs to be recognised that alternative measures of consumer price index
(CPI) inflation have continued to rule at elevated levels. For example, currently, the WPI
inflation is in negative territory - a sign that could be misinterpreted as the economy being in
deflation even when there is no contraction in aggregate demand - while the inflation rates
from the four CPIs are in the range of 9-10 per cent.
In India, given the heterogeneity of the economic structure and large differences in
consumption baskets, we have four consumer price indices, apart from the wholesale price
index. Given the relatively low income levels, food items constitute a very large proportion of
the consumption basket and this is reflected in their weights in the CPI indices (46-70 per
cent) relative to the WPI index (27 per cent). Fuel group has a weight of 14 per cent in WPI
but only in the range of 6-8 per cent in the consumer price indices. Commodities like metals
and products have a significant weight (8 per cent) in the WPI, but are not directly included in
the CPIs. Thus, differences in the weights of the items included in the various indices, along
with divergent price movements, not only create a wedge between the different inflation
measures but also move them in different directions.
Such divergences in alternative inflation measures complicate the conduct of monetary policy
in India. Accordingly, the Reserve Bank looks at all the measures of inflation, both overall
and disaggregated components, in conjunction with other economic and financial indicators,
to assess the underlying inflationary pressures.
In this context, the new price indices contemplated by the Government - CPI (Urban) and
CPI (Rural) - would be helpful. Furthermore, WPI with a more recent base and enhanced
coverage, including that of the service sector, may pave the way for a producers' price index
(PPI). The Reserve Bank has been constantly engaged in the refinements of the various
price indices and would continue to provide the necessary support to the Government to
bring about further improvements in the measurement of inflationary conditions.
(iii) Information on leading indicators for business cycles
Given the well-known lags in monetary policy transmission that I referred to earlier, it is
important for monetary policy to be forward looking. Timely and reliable information on the
likely evolution of economic activity and inflationary conditions and an ongoing assessment
of the transmission lags are important. While these issues are relevant for all economies,
they are more pertinent for emerging market economies (EMEs), like India, undergoing rapid
structural transformation. In the wake of the fast pace of structural transformation, the
transmission lags are subject to constant change. Similarly, the magnitude of key variables
such as investment, output and inflation in response to monetary policy impulses is likely to
vary over time. In view of these specific additional complexities in the transmission
mechanism in the EMEs, like India, it is important to develop robust lead indicators of
economic activity.
The Reserve Bank set up a Working Group in 2001 and a Technical Advisory Group in 2006
to get expert advice on development of leading economic indicators for the Indian economy.
We are now compiling a composite leading indicator (CLI) on a regular basis as an input for
monetary policy formulation. Economic and financial conditions can change quickly over a
very short period of time, as evidenced by the ongoing global financial crisis. We, therefore,
need a renewed focus on assessing cyclical conditions through leading indicators, including
supportive research on macroeconomic linkages, time series and seasonal adjustment,
business cycle analysis, short-term business indicators, sensitivity analysis, and detailed
analysis of quarterly results of the financial and non-financial companies to assess the
impact on the real sector. The slew of surveys initiated by the Reserve Bank over the past
few years have been very helpful and these would have to be further expanded/strengthened
as warranted.
(iv) Financial soundness indicators
The global financial crisis has brought into focus the importance of targeting financial stability
as an explicit variable. Even as policy makers and regulators are still grappling with the
precise definition and quantitative indicators of financial stability, there is a reasonable clarity
on the symptoms of financial instability. The responsibility for ensuring financial stability
implicitly rests with the central bank.
One of the several tools required for monitoring financial stability is stress testing - a term
that has now become widely used - but variedly understood. The United States has recently
published the results of its stress tests with very positive outcomes in terms of shaping
expectations and shoring up market confidence. Europe too is undertaking stress tests. As
part of the self assessment done by our Committee on Financial Sector Assessment (CFSA),
we too performed stress tests for the banking sector which showed that our banks are safe,
healthy and operating prudently.
The stress tests done by the CFSA are a good beginning, but admittedly rudimentary. We
need to refine both our database and our analytical capabilities for stress tests. This is
another challenge for the Reserve Bank on the data and analysis side.
(v) Data on employment
Finally, I come to a major gripe. Globally, trends in employment are one of the most
important inputs in setting monetary policy response. Unfortunately, we do not have any
reliable nation-wide statistics on employment. Data on factory-sector employment are
available from Annual Survey of Industry, but with a large lag that makes it virtually useless
for monetary policy purposes. Farm sector employment data are also available at poor
frequency and with long lags. Non-farm pay rolls capture employment trends in some
economies. But, in India, data on organised sector employment, as obtained from
employment exchanges, cover a very small part of the workforce. Against this backdrop,
timely and accurate information on employment conditions will enhance our understanding of
inflationary dynamics in the economy, and thereby improve the conduct of monetary policy.
Conclusion
I realise that I have covered a wide canvas. Even if somewhat incoherent, I have tried to
present to you the challenges the Reserve Bank faces in its everyday work in the area of
collection, analysis, interpretation, use and dissemination of statistics. I am aware that this
one-day seminar cannot find conclusive answers to all these questions, but I do hope your
expertise and insights will take us closer to solutions.
I wish this seminar all the best.