Data-dependent policy 

Context: Recently, the World Bank and the other by the International Monetary Fund published two different papers to assess the level of poverty in India. They concluded that poverty in India had declined considerably in recent years.

In this backdrop, the government has done well to restart the consumer expenditure survey process because the survey is critical for understanding the functioning of the Indian economy.  

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.

What has been the state of the Indian economy in the last two years? 

Indian Economy has witnessed severe impact on employment and income over the past two years due to pandemic-induced disruption. The disruption is likely to have affected consumption significantly. 

What measures were taken by the government to check slowdown in the economy? 

The fiscal interventions were made during the pandemic. It involved the distribution of free food grains to a large number of households.   

The government has done well to restart the economic activities and economic processes in India. 

What are the issues with the measurement of poverty?

There has been a lack of more recent and official consumption data. Therefore, Economists had to adopt different methods to gauge the level of poverty. 

The government had decided to scrap the consumer expenditure survey conducted in 2017-18 because of data quality issues.  

A fresh survey has not been conducted thereafter because of the outbreak of the pandemic.  

It has been argued that the consumption basket of Indian households has changed significantly over the last 10 years due to a growing economy.  

The weighting of food in the consumption basket has declined. The expenditure on services has increased.  

Way Forward 

Now the pandemic is under control, therefore, a new consumer expenditure survey must be carried out as soon as possible. The outcome of the survey would be critical for gauging the state of household consumption, poverty, or revising the base for GDP estimates and the consumer price index. 

The inflation rate based on headline consumer price index is the nominal anchor for monetary policy. Therefore, the index must be appropriately updated. 

The data is the most powerful tool to guide policy interventions. Therefore, it must be timely collected and disseminated in a rapidly changing economic environment.  

The government should also publish a new producer price index. can measure output, consumption, and price changes more accurately. This will help to ensure higher growth with macroeconomic stability. 

Way forward

Source: The post is based on an article “Data-dependent policy” published in the Business Standard on 26th April 2022.