Rating Agencies' "Sovereign Moody's Standard & Poor's Fitch

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DOWNGRADING INDIA!
 
 

How serious are the Rating Agencies’ “Sovereign

before we enter into the million
dollar question raised, the writer would like the readers to engage in few questions that make them capable enough to answer for themselves, the issue concerning the “relevance” of rating agencies rating a nation (read Sovereign Rating).

  • Are these rating agencies run like profit business houses?
  • Who gives money to the rating agencies to rate a nation?
  • Do these rating agencies have de­veloped certain “objectivity” either through ‘modelling’, ‘simulation’ or economic forecasting that imbibes all the subtle nuances of
  • the inherently “subjective” pattern in a nation’s life? In this you may consider the economic, political or social stability. Now, one dollar in America cannot be
  • compared with 1 rupee of India, similarly the coalition political hum-drums of India cannot be regarded as political instability in a dynamic democracy like India.
  • On the same count some religious skirmishes can­not be equated with the racial tension and anti-immigration violence of the Mexican border states of US (read along the Rio Grande River).

 
 
 
While you get to find the answers for the raised questions; we shall engage with the discussion for the present. As we proceed, we shall have the answers evolved on its own from the detailed discourse that we shall engage in the ins and outs of the rating-melodrama.
Sovereign rating is the “objective” rating (you can call it appraisal) done for a nation’s “utility value” as far as its investment potential is concerned. It is done by in-house agencies of some of the matured economies but for the other (to make it look credible) some world raters are allocated with the mandate. Presently, there are three such raters (others are also there but these names carry a wightage)-

  • Moody’s

  • Standard & Poor’s

  • Fitch

    • Further, the S-Rating (read Sover-
    • eign rating) determine a country’s abil­ity to borrow money, and how much interest it needs to pay. The higher a
    • its    interest     credit rating, the better ts interest rate will be. And countries with higher scores also have an easier time attracting investment capital.
    • This rating reflects factors such as a country’s economic status, transparency in the capital market, levels of public and private investment flows, foreign direct investment, foreign currency reserves, political stability, or the abil­ity for a country’s economy to remain stable despite political change.
    • Since it is the doorway into a country’s investment atmosphere, the sovereign rating is the first thing most institutional investors will look at when making a decision to invest money abroad. This rating gives the investor an immediate un­derstanding of the level of risk associated with investing in the country. A country with a sovereign rating will therefore get attention than one without. So to attract foreign money, most countries will strive to obtain a sovereign rating and they strive even so as to reach investment grade. In most circumstances, a country’s sovereign credit rating will be its upper limit of credit ratings.
    • But credit ratings don’t always tell the whole story.
    • Being “for profit” organizations they have their own ulterior motive to rate downward or upward a nation as a whole. Being called as Credit rating, any twitch that they report about the nation’s credit portfolio (the capability of the nation macro-economic domain to pay back the credit of the global fi­nancial institution with a ‘healthy’ RoI); a sentiment is created about any and every aspect of the nation concerned.
    • Over the years with the forces of globalization and WTO rules making a far free movement of ‘investible’; the “sentiments” which is generated by such “western” raters becomes im­portant for a nation like India which requires about a $ trn dollar invest­ment in this five year plan only for its infrastructure projects.
    • As, India was ‘relegated’ by S&P from stable to negative coupled with
    • a warning of ‘one in three’ chance of a rating downgrade within the next 24 months; the nation and the Government had to take notice. The reactions were of all kinds. From disdain to ‘we will improve’ to ‘we will talk with the S & P authorities to ‘reconsider”; everyone in the Raisina Hills took note.
    • For S&P, it cited slow fiscal progress and deteriorating economic indicators as the reason for its surprise move. For the moment, India’s credit rating on its long­term rupee debt has been left unchanged at ‘BBB-‘ (pronounced triple B minus). This is the lowest investment grade rating is­sued by S&P. However, the Government, in an effort to down play such a move, said the agency has only raised a red flag and not downgraded India. The outlook cut will not impact the ability of corpo­rates to borrow abroad, officials said. In the same vein the Captain of the Indian Financial Ship Mr Pranab Mukherjee, acknowledged Standard & Poor’s decision to cut India’s rating outlook to negative as a ‘timely warning.’ However, he felt there was no cause for panic.

 
 
What did the Report specifically say

  • S&P’s credit analyst, Mr Takahira Ogawa, said, “The outlook revision reflects our view of at least a one­in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal re­forms remains slow in a weakened political setting.”
  • India’s favourable long-term growth prospects and high level of foreign exchange reserves support the ratings. On the other hand, the country’s large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings, S&P said.
  • “We expect India’s real GDP per capita growth will likely remain moderately strong at 5.3 per cent in the current fiscal year ending

 
DEVELOPMENT OF SOVEREIGN RATING BUSINESS
 
 
Although the rating agencies’ current practice of assigning overall ratings for sovereign nsk began only a few decades ago, Moody’s has been rating bonds issued by foreign govern­ments since 1919. International bond markets were very active in the early part of the twentieth century. by 1929, Moody’s was rating bonds issued by roughly fifty central governments. The demand for sovereign ratings. however, abated with the onset of the Great Depression, and after World War II, the international bond markets came to a standstill_ In the 1970s, interna­tional bond markets revived, but demand for sovereign ratings was slow to materialize. The sovereign ratings business took off in the late 1980s and early 1990s when weaker credits found market conditions sufficiently favorable to issue debt in international credit markets. Before 1985, most initial ratings were AAA/Aaa; in the 1990s, the median rating assigned has been the lowest possible investment grade rating, BBB-/Baa. With the increase in demand for ratings, agency sovereign rating activity has returned to pre-Depression levels. Today Moody’s and Standard and Poor’s each rate about fifty sovereigns In the last few years, three additional rating agencies—Duff and Phelps,. IBCA. and Thomson BankWathave ventured into the sovereign rating business as well.
March 31, 2013, compared with
about 6 per cent on average over
the prior five years, but down from 8 per cent in the middle of the last decade,” Mr Ogawa said.

  • India’s favourable demography and the increasing middle-class popula-

tion will “undergird its medium-
term growth prospects, which in turn will support the sovereign ratings,” he added. The agency said
India’s external position remains
resilient despite the deterioration
in the past two years. The foreign
currency reserves cover about six months of current account pay­ments, down from’ eight months in 2008 and 2009.

  • High fiscal deficits and a heavy debt burden remain the most significant

constraints on sovereign ratings on India. “We expect only modest progress in fiscal and public sector reforms, given the political cycle —
wi        nex elections to be held
Icy .Ma 201 — and the current po

  • A downgrade is likely if the eco­nomic growth prospects dim, exter-

nal position deteriorates, political climate worsens, or fiscal reforms slow, Mr Ogawa said.
Unsolicited sovereign credit ratings on India
BBB— Long-term A-3 Short-term
BBB+ Transfer and
1/4       convertibility
 
 
„,•.,
What S&P wants
 
Reduce fuel and fertilizer subsidies Ki Introduce a nationwide goods and services tax

  • Ease restrictions on foreign ownership of various sectors such as banking, insurance, and retail

It is crucial time where the nation banking industry and the forex capabil­ity still is not that developed so as to tide over the investment needs for the infrastructural projects. Though there have been talks of releasing some money out of the bloated Forex Reserve to cre­ate Special Purpose Vehicle (SPV) which can then be invested for huge capital investment which the nation needs if it has to enter into a new paradigm of development.
Still the talks are at the level of talks only.
So for now, the bottom-line is that we need cheaply available “global float­ing” money which in a way also needs a growing market like India in which they can invest to have a fair degree of return. But “stability” is the rock word in the realm of international investment. And the rating downgrade has severely hit this aspect.

  • e  se rating agencies acting
    haughtily_
  • IIMir any objectivity within the rating domain of these raters among themselves? These are the questions that again come to mind.

Since, long these have become neo­activists of a new kind emerging as undeclared watchdogs. From America to Zambia, countries around the world are now under their scanner. Nations across the canvass — from developed to developing — go into a huddle when these soothsayers of the economy indulge in liberal advice of the unsolicited kind. Welcome to the world of credit raters. Not surprisingly, they have become active Opposition to ‘governing leaders’ — from Obama to Manmohan Singh.
And India is the latest to feel the rating heat.
After having discussed the first question, now we come to the second question. Is there any below potential.” With competition all pervasive, even among rating agencies, it becomes that much difficult to view the true picture. Is India growing? Or is it slipping? The glass is half-full or half-empty, depend­ing upon the viewer. While Moody’s sees in Reserve Bank of India’s (RBI) rate cut action positive signs, S&P reads negative signals from slowdown in reform measures.
Are these rating agencies testing their abilities a little too much? In 2008, we saw the collapse of big U.S. institutions with
 
There is no need to panic as the government is committed to economic reforms
-Finance Minister
Pranab Mukherjee
[Standard & Poor’s
Outlook On India Revised To Negative
From stable [E3BB+1 to negative [B BB—]
Reasons for lowering outlook
Deterioration in economic indicators due to slow fiscal progress
High fiscal deficits and a heavy debt burden remain the most significant constraints
Only modest progress in fiscal and public sector reforms, given the political cycle-with the next elections (by May 2014) and the current political gridlock
 
DOWNGRADING NDIA!

1—- i           Fitch Moody’s Standard & Poor’s
Macro/
Growth
GNP and GDP per capita
Consistency of monetary and
fiscal, policies and credibility
of policy framework;
Sustainability of long-term
growth path
Competitiveness of economy.
Depth of demand for local
currency;
Capacity to implement
countercyclical macro
policies; Composition of
current account.
Long-term volatility of nominal output; Scale of economy Integration in economic and trade zones. GDP per capita;
Rate and pattern of economic growth;
Range and efficiency of monetary policy tool Size and composition of savings and investment; Money and credit expansion; Price behavior in economic cycles.
Public
finance
Financial assets of government; Sovereign net foreign asset position. Volatility of government revenue Revenue-to-GDP ratio, Medium-term public debt dynamics, Credibility of fiscal policy framework and institutions;
Financial flexibility.
Government’s ability to raise taxes, cut spendings, sell assets, or obtain foreign currency (e.g., from official reserves) General government revenue, expenditure, and surplus/deficit trends Compatibility of fiscal stance with monetary and external factors, Revenue-raising flexibility and efficiency; Expenditure effectiveness and pressures; Size and health of nonfinancial public sector enterprises.
.
.
Debt Size and growth rate of public debt; Composition of government debt (maturity, interest rate, and currency) Contingent liabilities of government; Maturity and currency structure of foreign liabilities and assets; Distribution of foreign liabilities and assets by sector;Payment record. Level of debt Interest payments
and revenues; Structure of
government debt ;
Debt repayment burden;
Debt dynamics;
Conditional liabilities;
Financial depth.
General government gross and net debt; gross and net external debt; Share of revenue devoted to interest;
Debt service burden Maturity profile and currency composition;
Access to concessional funding; Debt and breath of local capital markets
Financial Sector Macro-prudential risk indicators; Quality of banking sector and supervision; Contingent liabilities of banking sector; Foreign ownership of banking sector Financial sector strength; Contingent liabilities of banking sector. Robustness of financial sector; Effectiveness of financial sector.
  • history, reputation and brand equity. The needle of suspicion for the collapse then pointed to the rating agencies.
  • From pure rating outfits, many of these agencies had by then gone a long way and diversified to offer a host of allied services to their clients whose debt instruments they rated. Not surprisingly, questions were raised then about their ability to rate objectively. The rating agencies themselves came under the scanner then. Since then, the world has changed a lot for them.
  • Far from being considered a ‘sus­pect’ for the global financial collapse, they have now become serious protago­nists of financial discipline. And this is the biggest mistake that the international financial sector is again committing. The financial world believes them. And, the resources-stressed governments look always for funders to relieve their worries. As said in the beginning itself, there can’t be a single rule to apprise even similar happenings in two nations at the same time. Ipso facto, the rating agencies have a decisive say.
  • Not everything could be looked at from a simplistic prism. In a vast democracy like India with very many federal governments, things will indeed progress slowly. Seeking consensus has its own perils and advantage. Much of the reforms happened in the’post-1990 period when New Delhi had a series of unstable governments. Somewhere along the line the country has lost its way. More than anything else, it betrays a sense of inability to practice what the corporate world now calls co-operative competition. Political leadership across the spectrum seems to have failed to practice a consensus approach to even a commonly agreed agenda. India is still a growth story. And, it is up to the leadership not to allow bad politics to spoil the economy of the nation.
  • The agency in its report has reiter­ated this fact that the government is the biggest drag on the investment and credit outlook for India. Similarly the IMF blames governance for poor inves­tor sentiment in India. “Concerns about governance and slow project approvals by the government have weakened business sentiment, which in turn has adversely affected investment, along with cyclical factors such as global uncertainty and policy tightening,” the IMF said in its Asia-Pacific Regional Economic Outlook released recently.
  • Since this comes at a time when S&P has already raised red flags over the deteriorating economic conditions in India, the government is “concerned”.
  • According to the IMF, steps to improve investment climate, removal of infrastructure bottlenecks and expansion of education opportunities, are needed to boost reforms. “It is also important for India to make progress in reducing barriers to trade, in order to maximise the potential of its continuing demographic dividend,” IMF said. On price rise, the multilateral agency stressed that fiscal consolidation is the key to containing inflationary pressures and creating space for priority development needs.
  • As the debate generated by the rat­ing agency’s action heats up, many ques­tions prop up. The rating agencies have become aggressive post-downgrading of U.S. rating.
  • Are their words ultimate? Will their new-found “competitive activism” give rise to a call for a ‘rater for raters’!

 
 
 

Moody’s S&P’s Fitch Credit worthiness
Ada AAA AAA An obligor has EXTREMELY STRONG capacity to meet its financial commitments.
Aal
Aa2
Aa3
AA+
AA
AA-
AA+ AA AA- An obligor has VERY STRONG capacity to meet its financial commitments. It differs from the highest rated obligors only in small degree.
Al
A2
A3
A+
A
A-
A+
A
A-
An obligor has STRONG capacity to meet its financial commitments but is somewhat susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
Baal
Baa2
Baa3
BBB+
BBB
BBB-
BBB+
BBB
BBB-
An obligor has ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are likely to lead to a weakened capacity of the obligor to meet its financial commitments.
Bat
Bat
Ba3
BB+
BB
BB-
BB+ BB BB- An obligor is LESS VULNERABLE in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitments.
B1
B2
B3
B+
B
B-
B+
B
B-
An obligor is MORE VULNERABLE than the obligors rated ‘BB`, but the obligor currently has the capacity to meet its financial commitments Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments
  • Since the “other” factors like ex­ternal finances, exchange rate, political situation of a country, effectiveness of govt, transparency and ‘occurrence of natural disasters act as indicators for the sovereign rating agencies and there cannot be any “objective” criteria that could be applied across the spatio­temporal spectrum to come with “most apt” answers to these questions.
  • Disaster like tornados in New Mexico will be different than the flood­ing in the Ganga plain. The difference is not only normative but also goes further. The disaster responsiveness makes a cyclonic storm in US like a drizzle while the case is vice versa for less developed nations.
  • Still with the disproportionate “impacts” of the sentiments that gets generated from such alphabetical letters with coinage of + and – to them should be questioned . And yes not to forget that at least we can expect the world economy to take this learning from the financial debacle that was in a way heralded by such raters.
  • For raters when Lehman Brothers looked than stable (read positive) was the time when so many skeletons were cooked under it. What finally hap­pened was that today Lehman Brothers has been relegated ‘finally’ from the international financial market.
  • Since, the prevalent attitude on the part of policymakers in developing borrowers is to accept uncritically the rating as well as the diagnosis offered by agencies like S&P (and similar other) warrants further analysis. In addition to the aforesaid ex­ample of Lehman, we also recall that past assessments of country risk by these agencies often failed to predict an impending crisis, as for example, in 1%7 for some Asian countries, in 1%4 for Mexico. Rather, the announcement of a downgrade brought in, as an ex-post event, a banking and financial crisis. Again, the judgment of the rating agencies cannot go unquestioned when one recalls the successive debt crunches of countries in southern Europe by end of 2009, most of which were cleared with AAA or AA ratings in 2006.
  • These failings also open up a debate as to why S&P decided to downgrade India, in particular, below investment grade with a debt/GDP ratio at 67 per cent, export growth at above 40 per cent, non-financial services rising at 17.1 per cent, official foreign exchange reserves rising by $5.7 billion over the six months ending September 2011, and with the stock adequate to finance six months of imports. The rise in the cur­rent account deficit to 3.6 per cent of GDP during April-September 2011 was preceded by a 3.8 per cent figure over the corresponding months 2010 net capital inflows, at $12.3 billion for FDI, record a smart performance as compared to $7.04 billion over the corresponding months in 2010.

What possibly is not a matter which should cause worries is the drop in net portfolio capital, which has fallen from $23.7 billion to $1.34 billion between April-September 2010 and 2011. After all, a drop in short term speculative finance to a country may not have much to do with a country’s long term investment potential. However, what the S&P rating criteria will never be concerned with is poverty and unemployment in the country which, if not worsening, has certainly been continuing. Obviously, such issues of the real economy have little to do with the financial sphere which would concern the credit rating agencies.
Judgments by agencies like S&P are subject to the following pre-suppositions in adjudging the credit ratings of coun­tries: first, that the rating agencies are in a position to judge, or even forecast, the state of political stability in these countries and weigh their significance for the credit transactions; second, that their own judgment (usually based on the mainstream doctrines) on economic policies will bring back what they con­sider “stability” in the borrowing coun­try. Of course, in such prescriptions the assessment or judgment relating to the state of the economy plays a vital part.
But when we try to marry these pre­suppositions with the questions that the writer has asked in the beginning; what we get is an extreme case of cynicism. Surely India as an economy is slowing but this is the time that international investment must be pumped-in as the “future” looks stable.
In these times should’nt there be a discourse about creativity in such rating agencies methodology that cuts beyond the present and extrapolate the future? Euro-Zones nations are facing the brunt of similar rating “back lashes”.
 
 
 

GOVERNMENT’S VITAL PARAMETERS
Credibility of Statistical Data at Stake
Prativa Rani Sahoo Government statistics are  under fire again. This time it is over the accuracy of the IIP numbers. This kind of criticism is becoming of a trend. Over of the past years the Government statistics have come under criticism not only from analysts and economists but also from the RBI (Reserve Bank of India).
Last year the Government data re­ceived a big thumb down from RBI. RBI Governor D Subbarao said that the Central Bank has been facing severe headwinds on multiple fronts because of the erroneous data published by the Government-from advance estimates of GDP to revisions in industrial production (IIP) numbers to the preference of WPI over CPI as a measure for inflation. RBI stating that it cannot make policy decisions relying on the data provided by the Government was a major drawback for Goverment statistics and statisticians.
In the post-Lehman era when RBI is in a high alert mode, frequent revisions have been made to the GDP data, which is one of the most watched numbers for policy makers, investors and economists, not only within India but also glob­ally. For example in February 2010, the advance estimate for GDP growth for 2009-10 was pegged at 6.8%. Three months later, this was revised to 7.7%. In February 2011, the quick estimates pegged it at 9.1%-a change of over 40% within a year. “Therefore, policy that per force had to use information on advance estimate of GDP was fraught with the risk of underestimating the growth momentum,” Subbarao said.
Further, a report by Siddhartha Sanyal of Barclays Capital pointed out a huge discrepancy between the rise in India’s petroleum import bill and the rise in the crude oil prices. The report showed that there was a “surprising stagnation” in India’s oil import bill since December 2010. Economists have also pointed out some other instances of serious lapses in important economic data. For example, in August 2010, the Government’s GDP growth data from the income side showed a stable growth of 8.8% while from the expenditure side
CSO

  • The Central Statistical Office which is one of the two wings of the National Sta­tistical Organisation (NSO) is responsible for coordination of statistical activities in the country and for evolving and main­taining statistical standards. Its activities include compilation of National Accounts; conduct of Annual Survey of Industries and Economic Censuses, compilation of Index of Industrial Production, as well as Consumer Price Indices. It also deals with various social statistics, training, international cooperation. Industrial Clas­sification, etc
  • The CSO is headed by a Director-General who is assisted by 5 Additional Director-Generals looking after the Na­tional Accounts Division, Social Statistics Division, Economic Statistics Division, Training Division and the Coordination and Publication Division.
  • it showed a miniscule growth of 3.8%. As questions were raised, within a cou­ple of days, the GDP growth data from the expenditure side was subsequently revised to about 10%.
  • This trend has continued in recent months, the quality of some very im-
  • portant statistical data released by the
  • Government has been questioned. For instance, the IIP index (growth index of
  • industrial production), used by analysts as an indicator of near term trends in industrial growth, had to be revised downward in January this year due to error in estimates used to arrive at initial projections. The accuracy of IIP numbers has also been questioned due to wide variations in different periods and big gaps between initial and revised numbers. The Government had to slash the January IIP growth figure from 6.8 per cent to 1.1 per cent citing “Incorrect Reporting”. The CSO (Central Statistical Organisation) blamed the hugh revision on incorrect estimates for sugar produc­tion used in initial projections.
  • Its release reported that the sugar production was wrongly estimated as 13.41 million tonnes instead of the correct figure of 5.81 million tonnes. According to the CSO officials, the response rate for IIP hovers around 80-85%, at the time of release, but much of the data

 
 
 
THE CPI IS NOT THE NEW IIP
 

  • The Deputy Director General of the Central Statistics Office denied the skepticism and clarified some doubts about CPI figures. Regarding not providing indices for the base year of 2010, the Central Statistics Office (CSO) clarified at the time of the release of the CPI (rural/urban) for the first month of January 2011 that inflation rates (year on year) would be available only from January 2012. One may recall that inflation rates for CPI for industrial workers (IW) with a 2001 are available only from January 2007 and those of the Wholesale Price Index (WPI) with the base year 2004-05 are available from April 2006.
  • The inflation rates given by the analyst is wrong. CPI (IW) and CPI for agricultural labourers (AL) for March 2012 were not available at the time of publication of the article. Further, inflation rates based on CSO’s series have also been “misquoted”. The inflation rates for January-March 2012 based on the published numbers will be 8.1%, 9.3% and 8.7%, respectively, for CPI (rural/urban/combined) instead of the (8.7%/10.2%/9.5%) as claimed by the author.
  • It is not clear why the period of April to December has been considered for the com­pilation of inflation rates for 2011. The author could have taken the entire year, January to December. Even if April to December is taken, indices for April to December 2010 might be computed by working out linking factors between ‘CPI (AL) and CPI(rural)’ and `CPI(IW) and CPI(urban)’ for the base period of 2010 using the splicing method. By this procedure, inflation rates for April to December 2011 are 11.4 % (rural) and 8.3% (urban), significantly lower than the 13.6% (rural) and 10.7% (urban) shown by the author. If one were to make some efforts and study the movement of various indices, then it is seen that the difference in the inflation rates measured by these indices can be attributed to the differences in the target population, weighting pattern, area coverage and coverage of markets,
  • CPI (rural/urban), which covers all the states/UTs and also remote regions of the country should not be simply criticised because it gives higher inflation rates as compared to those of arrives at the CSO too late for proper verification thus leading to the errors and requirement of frequent and step corrections.
  • The issues have also been raised about other indices used prominently in policy decisions. Recently an analyst had loudly mused if CPI (Cunsumer price index) is the new IIP. According to the analyst this new series was sys¬tematically registering excess inflation of over 2 per cent in each month of 2012. In other words, the “true” CPI was likely to be closer to a figure of 7 per cent than the reported figure of 9.5 per cent. Undoubtedly still a worrisome and high inflation number, and one whose causes remain somewhat under-investigated. The figure of 7-odd per cent is consistent with a decline in inflation from than the 9-plus per cent levels registered in each of the three years ranging from 2008 to 2010.
  • The critics and the skeptics pointed that the new series had new updated 2004-05 consumption pattern, in which there are many new centers from where data were gathered, and some new items of consumption, for example, computers, laptops, mobile phones, etc. Also, weights attached to different items have been revised. With these differences, it was expected that the new technologically
  • improved CPI would show a dif¬ferent rate of inflation. However the difference of than two percentage points each month was not expected. Different weights, etc can be expected to have a one-time effect, but a persistent inflation effect was likely as uncommon as a ministry spending seven times than its allocation.
  • Of the three determinants, the last two are expected to show lower, not higher, inflation. New centers normally mean that the poorer regions are a higher percentage of the total, and poorer regions tend to have both lower price levels and the same or lower inflation.
  • Same arguments also stand good for the newer goods. Such goods have higher technology content, and technological progress tends to generate lower than average inflation. Thus, one is left with a change in the weights attached as a major explanatory for differences in inflation rates between the old CPI series and the new series.
  • The old and new rural CPI series can be compared to reveal contributions of each determinant. The new series identifies 21 broad categories with 2004¬05 expenditure weights derived from NSS household expenditure data. NSS expenditures for these 21 items are aver¬aged for the years 1983 and 1993-94 to approximate the old CPI expenditure weights of 1986-87. These weights allow us to identify the contribution of different factors. Economists also pointed out that of late weekly as well as monthly inflation data are regularly revised by a substantial margin, and mostly on the upside. This, in turn, fails to give analysts and policy makers the true state of the economy apart from hampering policy decisions.
  • Besides the IIP figures, the poverty estimates and estimates of budget deficit have also been criticized adding to the unease.
  • The volatility in the data from one month to the next and proper explana¬tion for the various anomalies has raised concern among economists and analysts alike about not just the validity of data used but also about the computational integrity. This is a very terrible situation as such doubts if left lingering lead to policy paralysis ultimately hampering growth and development.
  •  population segment-specific CPI numbers.

 
 
 
 
 

GOVERNMENT’S VITAL PARAMETERS

UNDERESTIMATION OF POVERTY

The Planning Commission’s estimate puts the number of BPL families at 62.5 million, while state Governments say the number is closer to 107 million, Planning Commission’s new poverty estimates based on Tendulkar report says these are official figures and will act as ceiling for Government programmes. If BPL census shows higher numbers, the Government has indicated that beneficiaries of schemes targeted at BPL households would be those identified as poor by the Planning
Commission.
This means that some poor, as identified in the census, will be excluded from the purview of such schemes. India has always had trouble with the ways and means of defining poverty and identifying the poor, The identification of the 46 per cent poverty cap, estimated by the Planning Commission, will be done through a set of automatic exclusion and automatic inclusion criteria, and the remaining households will be classified through the deprivation indicators. At the same time, State-wise caps based on the S.D. Tendulkar meth­odology have been allowed for better targeting of those living below the poverty line. The 46 per cent cap is lower than the 50 per cent suggested by the N,C, Saxena Committee.
The purpose of a poverty line is to measure how many rise above it over a period of time. For this, the definition of the poverty line
should not change across the two points of time being compared. Based on this, the Planning Commission correctly used the Tendulkar Committee’s definition to estimate that the poverty ratio registered a decline from 37.2 per cent in 2004-05 to 29.8 per cent in 2009-10. A higher poverty line may have yielded a larger percentage of the poor; but it would still have shown a decline over time. The error that the Planning Commission made was in framing, by using the norm of expenditure per person per day. Indians largely think in terms of monthly family budgets, While the daily rupee figure may seem absurdly low, when translated into a monthly budget for a four person family, it works out to tolerable Rs 4,000-plus. That is, no doubt, still very low, but even the very poor in India do manage with such incomes. Also, pooling generates purchasing power.
The other reason for the chorus of criticism against the Planning Commission’s estimate is that socially acceptable standards of living itself have gone up in a affluent India.
The lesson from all this is: Statistics can abet illusions, unless properly understood and used.
 
 
SHORTAGE OF STATISTICIANS IN INDIA
The news of shortage of statisticians came amidst repeated criticism by analysts of the quality of official Government data in recent months, One in four posts of Government statisticians are lying vacant, the Government has told a parliamentary committee. The Ministry of Statistics and Programme Implementation has told the Parliament Standing Committee on Finance that there are about 26 per cent
vacancies in the Indian Statistical Services and Subordinate Statistical Service.
According to the report of the committee, the Ministry told Members of Parliament that, “In the absence of regular field staff as per requirement, the sample surveys to be undertaken by NSSO will have to be conducted through Contract Employees, which may affect the quality of data collected.”
The Ministry went on to tell the committee that, “The vacancies in ISS (Indian Statistical Service) are primarily because the UPSC has not been able to meet the indent for direct recruits for ISS. According to the ministry, there are 1200 vacancies in the Subordinate Statistical Service or SSS.
 
 

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