No Proof Required

Does NREGA really work?

By

Surjit S Bhalla

(Business Standard, Mar. 27, 2010)

Blurb: Despite tall claims, the NREGA program is just a dud as most other “in the name of the poor” expenditures – and as much of a dud as predicted by Rajiv Gandhi.

A decade or so ago, Booker prize winner Ms. Arundhati Roy claimed that the building of dams in India had displaced more than 50 million people. This implied that one out of every three rural Indians had had to move because of the construction of dams (remember the population was a lot lower when most of the dams were built in the 1950s, 1960s and 1970s). Upon closer examination, it turned out that the number of people displaced was more than a tenth lower, with the likely estimate around 3 million.

It is poetic and novelist license to indulge in hyperbole; it is quite another matter when official agencies of the government do the same. And especially in the good governance era of 2010 and beyond. The latest report of the Ministry of Rural Development, (the one in charge of implementing the National Rural Employment Guarantee Act , NREGA) makes an Arundhati Roy like claim: that as of Dec. 2009, 43 million households had been provided with NREGA employment in 2009/10. The last quarter of the fiscal year is the largest for such employment : around a third of total NREGA jobs. The projected employment for 2009/10 is likely to be close to 50 million households. There are about 150 million rural households; this Congress claim is the same as Ms. Roy: one out of every 3 households in rural areas will have worked on NREGA! Even more remarkable – the jobs are meant to be hard work, menial, at minimum wages and for the poor. In 2004/5, official estimates place  rural poverty in India between 20 to 25 percent. Assuming no improvement in poverty at all – an extraordinary accomplishment for a government that prides itself on inclusive growth – 22.5 percent poor households mean 34 million. So the government is claiming that every poor household is covered, and for good measure, 50 percent more are provided employment.

This superlative achievement is credited by many – both within the Congress and the Opposition – for Congress’s surprise win in the 2009 elections. Some of us had predicted such a win, but without recourse to this super weapon of opposition destruction. It was because we had not looked at the government data. In 2006/7, the first full year of implementation, the government claimed to have provided employment to 21 million households. In the space of just three years, the government is claiming to have increased jobs for the poor to 50 million. No wonder the Congress won, and won so emphatically. The poor just love the Congress, because it has stood tall for them.

But has it? It was not so long ago that Rajiv Gandhi had stated that he had found well meaning programs meant for the poor but not reaching the poor. Without much scientific basis, he came out with the assertion that only 15 percent of the expenditures meant for the poor actually reached the poor. Experts who have tried to test this assertion have found more truth in that statement than almost any other forecast of an economist, defunct or otherwise.

There is a way to test the veracity of Rajiv Gandhi’s prediction, and the Congress governments’ claim on reaching the poor. In 2006/7, in the 63^rd round of the all India NSS survey, a special question was asked of those above the age of 15: did you work in a public works program during the last 365 days, what wage did you get and how many days did you work. These answers are reported in the Table along with the statistics from the Ministry of Rural Development. The latter are for the period April 2006 to March 2007; the NSS figures are for the period July 2006 to June 2007. To the extent the rapid expansion of NREGA is true, the NSS figures are an over-estimate of the “true” financial year figures.

The first figure of note is the fact that NREGA was not able to spend all the money allocated for it; indeed, it spent less than three-fourths of what was allocated. Of course, those were early days of the program, but even in 2008/9, when allocations reached Rs. 30,000 crores, the NREGA authorities were able to spend only 73 percent. The Ministry claims only Rs. 8823 crores were spent in 2006/7, and two-thirds of this amount (Rs. 5842 crores) was spent on wages. The rest are administrative costs, capital equipment, etc. i.e. Rs. 3250 crores were spent to facilitate expenditures. But was this money ostensibly spent as wages – Rs. 5842 crores –received as wages by NREGA workers? According to the NSS, only half of the expenditures allocated as wages was received as wages – Rs. 3000 cores received vs. Rs. 5842 crores meant to have been received. Even less went to the target poor worker. The NSS reports that NREGA wages received by the poor were only Rs. 1270 crores.

Let us ponder on this figure for a little while. The government announces with much fanfare that it is spending a lot to fight hunger, poverty, injustice and inequality. Despite repeated evidence for the last twenty years that “in the name of the poor programs”, and especially in the name of the poor programs, reach everybody but the poor, the well-meaning socialist but not so realist Congress renamed and expanded existing food for work programs under its own Congress brand as NREGA, and now MREGA. (Ironically, but poetic justice style, the latter acronym also means “to die”!). It spends Rs. 8823 crores on the program in 2006/7 (and Rs. 39000 crores in 2009/10) and is able to actually deliver only 14.7 percent (Rs. 1270 crores) to the targeted audience?! The figures suggest that Rajiv Gandhi, the enlightened pragmatic realist, was extraordinarily right.  

The author is Chairman of Oxus Investments, an emerging market advisory and fund management firm. Please  visit www.oxusinvestments.com  for an archive of articles et; comments welcome at surjit.bhalla@oxusinvestments.com

.

No Proof Required

Beware copycat attacks

By

Surjit S Bhalla

(Business Standard, Feb. 13, 2010)

Blurb: Our copycat analysts are asking for an interest rate hike just because there is talk of this in the west — never mind that Indian rates are higher than enough and all inflation is food-related. 

There is talk of fiscal stimulus being removed in the Western world, and our copy cat analysts, bankers and experts (CCABE) regurgitate the same. There is talk of interest rates rising in the Western world, from near zero levels, and you guessed it, our CCABEs talk about the need to raise interest rates. Then there is a bailout for Greece, and the CCABE remind us that we have high fiscal deficits, and we need to get our act together, and cut fiscal deficits. But should expenditures be cut, or taxes be raised? Of course the latter, because as some even argue, efficiency of tax collection goes up with an increase in tax rates! And expenditures cannot be cut, because they are meant for the poor.

 It is true that the world is a lot more synchronized today than it ever was. But co-ordination does not imply equality, let alone identity. The economic facts suggest that the CCAE recommendations are not only way off the target, but very likely, will also fail the test of time. In this article, the “no-brainer” CCABE case for raising interest rates will be examined.

Clues about what the repo rate in India should be are obtained by examining the data on real repo rates in developed and developing economies. Real  (repo) overnight rates in the developing countries have been about 50 basis points higher than the developed countries; long term rates about 1 percentage point higher. The average real repo rate in rich countries – about 2 percent. So when CCAE argues for an increase in interest rates, what is it assuming about Indian inflation, and what is it assuming about the desired level of real rates?

Central to the calculation of the real interest rate is the inflation rate, and perhaps more accurately, the expected inflation rate. Defining, and especially measuring, the latter is the biggest mug game of all. The only recourse for policy makers (and analysts) is to gauge the trend in the overall inflation rate. Recognizing that food and energy prices are volatile, central bankers prefer to use the “core” inflation rate defined as inflation of all goods and services minus food and fuel inflation.

But, surely, this is inappropriate “for a country like India”. Food is an important part of consumption of the poor, so food inflation is important. Of course it is, which is why the UPA government’s failure to release foodstocks to help mitigate the rise in prices is all the more reprehensible. Today, we have to add the new “populist” decision to ban the production of BT brinjal. This must be the only time when the well meaning in the name of the poor and the environment NGOs were hand in hand with inefficient crony capitalist subsidy consuming fertilizer manufacturers, the major beneficiaries of the environment minister, Jairam Ramesh’s unfortunate “technical” decision.

The digression underlines the point that while food inflation hurts the poor more, it should not be made an excuse to hurt the poor even more by raising interest rates. It is imperative for central bankers (and even CCABE’s) to have appropriate policies to ensure potential growth and have low inflation. A recent paper by an RBI staff member, Deepak Mohanty, comprehensively shows that no matter what the definition of inflation (CPI, WPI, or the most comprehensive GDP deflator) the recent bout of inflation is all food. Excluding food, inflation has been negative. His analysis, however, only contains data till November 2009;  the CCABE argument is that food inflation is spilling into non-food items and this means that the RBI should raise interest rates (and not because we are copy-cats).

The CSO has just released its estimate for GDP growth for India for 2009/10 and all the journalistic and expert copy has been oriented towards evaluating the GDP growth rate of 7.2 percent. What is remarkable, and relevant, for inflationary expectations and monetary policy is the estimate of (GDP deflator) inflation contained in the CSO calculations – only 3.7 percent for the full fiscal year 2009/10. Agriculture (food) and community, social and personal services (government) account for 31 percent of GDP and have a 9.3 percent inflation rate. The other 69 percent of GDP (do the math and also see the table) is expected to have an average inflation rate of less than 1 percent! It would be a sad day indeed if the RBI, goaded on by the CCABE’s, were to raise interest rates to counter near zero inflation. Both of the present inflation drivers are expected to be substantially less in the coming year (though nobody ever went broke overestimating the ability of the government to cause food inflation with plentiful stocks). Inflation in government services is due to the Pay Commission increase, and food inflation occurred because of ineptitude and drought. At least one contributor should be less next year.

What all this means is that food inflation is a problem, but not overall inflation. And overall inflation is likely to be between 3 and 4 percent next year, say 3.5 percent. A 50 basis point real repo rate in the developed economies (means that the FED and the rest of the developed world will raise rates by 250 basis points this year, an unlikely possibility) means a 100 basis point real repo rate in India, or a 4.5 percent nominal rate in India. And at 4.75 percent, we in India are already above this expected peak level for 2010.

The real reality is that interest rates in India, thanks to the great financial crisis, are not greatly above trend normal levels. The problem lies on the fiscal side, and within it, on wasteful, extravagant, populist and not benefitting the poor expenditure. More on this later.

Deepak Mohanty, “Measures of Inflation in India: Issues and Perspectives”, RBI, Jan. 2010

The author is Chairman of Oxus Investments and  anchor of Tough Talk, a talk show on NDTV profit; please visit www.oxusinvestments.com  for an archive of articles etc.

No Proof Required

India’s Real Poverty

By

Surjit S Bhalla

(Business Standard, Jan. 9, 2010)

Blurb: Even if you raise the poverty line as much as the Expert Group does, it turns out that just 11 percent of Indians are poor, not 37 percent--- that is a huge poverty of estimation.

That the study of poverty is a major industry in India (and the World Bank) is a fact. Whether this is as it should be is another story. The Planning Commission of India, under the direction of its chief, Montek Ahluwalia, has set up an internal committee to recommend the future of the Commission i.e. whether it has outlived its original purpose, and what its new role in life should be. This is indicative of clear, forward thinking. A pity, therefore, that it comes on the heels of an old fashioned publication by the same organization “The Expert Group to Review the Methodology for Estimation of Poverty”, hereafter EGMEP.

The analysis of poverty can get controversial, and complicated. There is technical stuff involved, of the sort not suitable for a family newspaper. But in reality, the calculation of poverty is very simple. A person is poor if her real consumption is below the stipulated level of consumption deemed the poverty line. If so simple, then why the controversy and why the need for EGMEP and its volumes of publications?

The Expert Group on poverty misses out on two crucial developments: poverty in India is becoming relative and the existing method of measuring poverty is prone to large and inexplicable errors. Let us deconstruct the route taken by EGMEP to come out with its assessment that the fraction of people poor in India was not around 21 percent but close to double that amount at 37 percent. The major departure for EGMEP is to change the poverty line, and increase it by 16 percent for the urban areas and a whopping 36 percent for rural India. The motivation – because the earlier poverty line was not comprehensive enough (it did not include estimates for expenditures on health and education) and was pointing to lower rates of inflation than actually existed. On both counts, the EGMEP suffers from either a lack of appreciation of what a poverty line is, or myopia, or both.

A poverty line is just a level of consumption. How Ms. Sita chooses to spend this amount – on food, liquor, movies, or children’s education - is ultimately her choice. In the olden days (the one the Planning Commission has set up a committee to forget) the Planner decided what Sita should spend on, and thus arrived at a justification for the poverty line. As I have written elsewhere, the developing countries should, and must, raise the poverty line. This to account for the growth that has taken place since the poverty line was first constructed in the 1960s. Coincidentally, the average 26 percent increase recommended by the Expert Group in 2009 is almost identical to the recommendation contained in Bhalla(2003)*.

Rather than state the obvious fact that the level of consumption that was considered non-poor in 1960 should in 2010 be considered poor, the Expert Group goes about catching the poverty nose in a typically Indian way (by going behind the neck yoga style). The basket of the urban poor around the old poverty line is defined to be the “new normal poor”. By using residence of an individual as the basis for defining the poor, the EGMEP breaks new ground, is pioneering. It would have been simpler to just state that the absolute poverty line is being raised, period. Why would anyone object to that?

The convolutions that set in because of this desire to be technical (again, the details not suited for family consumption) lead the Group into avoidable errors. If they mention it once, they mention it twenty times: the CPI index for agricultural workers (CPIAL) has been understating inflation for rural workers; hence, one should use the internal price indices generated by the NSS surveys. The Group cites an important study by Prof. Deaton who showed that NSS inflation during 1999-2004 was 14 percent compared to the CPIAL figure of 11 percent. The Group fails to note that over the longer period, 1987-2004, the CPIAL was overstating inflation by 7 percent. Hence, that is a basis for lowering the poverty line by 7 percent rather than raising it by 3 percent – an error gap of 10 percent.

But these errors are minor compared to the most glaring omission of all – indeed, a deliberate commission. As is well known to the Expert Group headed by Prof. Tendulkar, until recently head of the Statistical Commission of India (where I served for 3 years as a member), the National Sample Surveys have been suffering from extreme inefficiency. The amount of national consumption captured by the surveys reached a nadir of 48.7 percent in the 2004/5 survey. This means that in the 2004/5 survey, 51 percent of the consumption in the economy – of wheat, fruits, vegetables, airline travel, Rolls Royce’s etc – did not accrue to the Ambani’s, you, me or the poor. This is a large dose of missing consumption.

According to the NSS survey, this missing consumption does not exist, was never there, is a fiction of your imagination. But it is there accruing to all households in the economy. And a  detailed investigation (see Bhalla, Imagine…) shows that the NSS surveys underestimate consumption for all households, rich and poor, on an approximately proportionate basis i.e. consumption for all households needs to be increased by the same proportion, in order that the lower survey mean and the higher national accounts mean match. An example can help illustrate. Assume that the 1987 NSS survey was approximately right. In that year, the survey mean was only 71 percent of the national accounts mean.  So 29 percent of total consumption was missing, and perhaps even accrued exclusively to the rich households. But we need to still allocate (71 – 48.7) 22.3 percent of total consumption. Proportionate adjustment would mean that all consumption be increased by the factor  (71/48.7) 1.46. On a conservative basis, the multiplier for the poor is reduced by 10 percent, so instead of 1.46 it is 1.41. Note the extreme indulgence EGMEP shows for its perceived inflation error of 3 percent between 1999 and 2004. And there is no concern, not even a footnote mention, of the glaring error of at least 41 percent understatement in the consumption of the poor? Talk about missing the entire forest, and the trees as well.

What a difference the errors of omission and commission make to the poverty estimates is illustrated in the Table. Estimates of the head count ratio (HCR) of poverty are presented for the two different poverty lines. The big conclusions are as follows. First, a correct adjustment for inflation reduces the HCR by 3-5 percentage points (not raise it as believed by the Expert Group). Second, a conservative adjustment to the 1987 level of efficiency reduces national poverty to 5 percent. Since relative poverty is considerably more than 5 percent, there is a clear case for substantially raising the poverty line. But if this poverty line is raised as per the recommendations of EGREM, poverty in India is still only 11 percent. This suggests that the method of measuring poverty needs to be changed – maybe an appointment of a new Expert Group, and one less steeped in pre-ordained conclusions?

Bhalla, Surjit S (2002), Imagine There’s No Country: Poverty, Inequality and Growth in the Era of Globalization, Institute of International Economics, Washington.

Bhalla, Surjit S (2003), “Raising the Standard: The War on Global Poverty”, paper presented at an Initiative for Policy Dialogue conference, Columbia University, March 31-April 1, 2003; chapter in Anand, Sudhir, Paul Segal and Joseph Stiglitz, edited, Debates on the Measurement of Global Poverty, Oxford University Press, 2009.

The author is Chairman of Oxus Investment; all the past articles (and forecasts)  are available  on  www.oxusinvestments.com .

Poverty in India, in percent of population, 2004-05

Notes: 1) Inflation adjustment means that the poverty line in rural areas matches internal NSS inflation; this is the recommendation of the Expert Group.

2)  The “1987 level of accuracy” refers to the ratio of survey to national accounts mean consumption of 71 percent. This is taken as the “truth” implying that 29 percent of Indian consumption does not accrue to anybody, rich or poor. See text and Bhalla(2002,2003) for details.

3) Calculations of poverty are for the NSS 2004/5 survey, unit level data. The three assumptions yield the three estimates. The most preferred estimate is “NSS-Consumption Measurement at 1987 levels of accuracy”.

No Proof Required

Climate change: Promises, Promises

By

Surjit S Bhalla

(Business Standard, Nov.21, 2009)

Blurb:  When it comes to climate, change and promise may only be in the eye of the beholder. 

This has been a hot week for climate talks. The two laggards, China and the US, both departed from their no commitment stand to boldly announce the following: the US to reduce its carbon emissions by 17 % over 2005 levels, and China to reduce the intensity (CO2 emissions per unit of output)  by 40-45 percent. Europe has already promised a 40 percent cut in per capita terms. (The terminal date for these promises is 2020 or 2025).The US promise is not as little as it seems, and the China promise not as large. In per capita terms, the US is promising about a 30 percent reduction (population will increase by 15 percent or so between now and 2025), and 50 percent reduction in intensity of output (output expected to increase by 50 percent or so over the next 18 years).

The headlines are suggesting that it is India’s turn to act. India has consistently avoided making any commitments on CO2 reduction. Its’ belief, and argument, is that the first commitment of India is towards poverty reduction; such poverty reduction can only come about through sustained economic growth; and sustained economic growth means that carbon emissions have to go up. Hence, India’s promise to keep its per capita emissions below the level of the developed world.

In the previous article, (India: Need for Change in Climate, Business Standard, Nov 7^th), I had argued that the per capita promise was not in our best interests. Indeed, a better negotiating position for India would be to say that the intensity of our output will not exceed some norm that all countries agree to. Countries whose intensity of output is worse than this benchmark should be required to cut emissions first; those with intensity less should follow in a pro-rata fashion until the world target of total emissions is achieved. Such a stance would be consistent with the negotiating position of both the big polluters China and the US. And it would protect India’s  growth prospects more. (This is pursued in the next and final part of this three part series on climate policy).  

Various countries have promised various targets for various years – absolute cuts, per capita cuts, intensity cuts etc. How can these different efforts or different burdens or different promises or different sacrifices be compared? For that, one needs to have a metric of “sacrifice”. For example, assume I belong to a heavily developed economy which is in the post-industrialization phase. This economy will have lower energy needs than an economy that is in the early stages of industrialization (LDC). The former will be naturally reducing the intensity of its emissions (energy used per unit of income or output); the LDC is likely to go through a phase of first increasing this intensity. Analysis of over 130 countries for the period 1990 to 2007 suggests the following pattern: emissions per capita increase by 1.5 percent for each 1 percent increase in income for income levels up to 2007 PPP$ 2700 per capita; by 1.3 percent for the income range 2700 to 20000, and by only 0.7 percent for incomes above PPP $ 20,000 per capita. These response coefficients are higher for countries whose share of industry in GDP is higher than average e.g. China, and lower for those whose industrialization, ceteris paribus, is below average, e.g. India. (For comparison purposes, the per capita 2007 income levels for India, China and the US were PPP $ 4800, 9800 and 47000, respectively).

There is another stylized fact about emissions intensity – they have been falling over time and for countries at all ranges of income. This is on-going technical change. For the last twenty years, the average worldwide fall in intensity has been around 1.5 percent per annum. The table reports these intensities, and related data, for selected regions and countries of the world.

Two business-as-usual (BAU) scenarios are reported. Given a set of per capita growth rates, and a traditional growth with emissions model, one can compute the expected use of CO2 emissions in 2025 – this is BAU.  This level is computed without allowance for technical change as has already occurred, for different countries at different rates, over the period 1990 to 2007. This technical change is computed simply as the weighted average of the (log) percent change in intensity, with a higher weight (.65) for the more recent period (2000 to 2007) and a lower weight (.35) for the 1990 to 1999 period.  If this trend increase in technological change is assumed to continue for the period 2007 to 2025 (a conservative assumption) one arrives at an estimate of BAU* i.e. the best that can be expected from each country given its level of development. BAU* can also be considered as a “no sacrifice” level. (Note that the total CO2 output with the technical change assumption is 48.3 b tons – still considerably higher than the 30 billion tons target – again, a matter explored in the next article).

The intensity of output for each of the three years 1990, 2007 and 2025 is also reported. The final column reports on the reduction in intensity from 2007 levels. The following three conclusions are immediately apparent. First, India’s intensity of CO2 use is among the lowest in the world (and equal to that of Europe in 2007), and China among the highest. Second, India’s trend decline in intensity is comparable to the world average. Third, China’s promise to cut the intensity of emissions by 40 percent is good, but really, it is just what would have been expected given the nature of technical change; actually, it is a few percentage points lower!  There isn’t any “sacrifice” or any extra effort. The implications of the results on intensity for country targets, technology transfer, and climate aid will be explored in the next article.

Table: CO2 Emissions and Intensity: 1990 - 2025

Notes: (1)  Intensity is defined as CO2 emissions per unit of GDP; the final column is the change in intensity in percentage terms and corresponds to the commitment made by China (40 percent reduction).

(2)BAU and BAU* are 2 business as usual forecasts for 2025; BAU is a straight extrapolation based on the historical relationship of per capita CO2 emissions and per capita income (measured in 2007 PPP $). BAU* incorporates the effects of technological change (decline in intensity of emissions per unit of output)  that have taken place across most countries over the last two decades;  a weighted average (65 % weight for the 2000-2007 period and 35 % for the 1990-1999 period)  of this annual technical change is assumed to continue for the period 2008 to 2025.  Population extrapolations are from UN and income forecasts are based on expected income growth rates in different countries. 

This article is part of a paper “Climate Change – What’s  it all about and what is to be done” , forthcoming and available, with past articles,  at  www.oxusinvestments.com.

Blurb: Fiscal policy is forced to be expansionary in India because monetary policy is failing to perform its assigned role.

The RBI governor, Dr. Subbarao, recently announced that he was seeking discussion and perhaps even criticism from within his organization. This is definitely newsworthy and Dr. Subbarao should be applauded for taking this initiative. The RBI is perhaps the last of the feudal organizations in India (along with all the political parties) and this attempt at an entry into the 20^th century is laudable. I wish Dr. Subbarao luck; having worked on two RBI committees a decade apart (in 1997 and 2006, under the chairmanship of former Deputy Governor and a true-blue RBI man Mr. Tarapore) I can say with some experience that the RBI does not take lightly to anti-feudal forces.

No sooner had Dr. Subbarao made his plea for dissension, the empire struck back. In its quarterly review on Tuesday July 21, the RBI viewed the economy in a dour manner (why so serious?). It kept tight monetary policy tight (highest real interest rates in the world if one uses the GDP deflator) and warned of impending inflationary dangers. Believing full throttle in this gloomy stagflation outlook, the RBI  lowered the forecast for GDP growth for 2009/10 from 7.5-8 percent (made in Jan. 2009) to 6 percent. Correspondingly, it raised its forecast for WPI inflation in March next year from 3 percent to 5 percent. (See table). These pronouncements are put into focus by noting three facts. First, internationally, India is the only economy that is lowering its GDP forecast, while most are debating not that GDP will be higher in 2009, but how much higher. Second, while all expect inflation to be higher than zero inflation, there is no central banker of a non banana republic (that I know) who is forecasting this high inflation.

The third fact is perhaps the most damning. The table shows the past forecasts and the errors on both. Note that it is nobody’s contention that the forecast errors should be zero. That would be like forecasting the past. What is desirable is that the forecasts have a randomness to them such that over time the errors add up to zero. Unfortunately, nothing of the sort occurs with RBI forecasts. Very consistently, the RBI under-estimates GDP growth by about 1 to 1.5 percent - it gloriously missed the entire growth acceleration between 2004 and 2007. In May 2004, the growth forecast for 2004/5 was 8.1 percent, but in October it got lowered by 2 percentage points. Which means that the RBI was expecting GDP growth (in Oct. 2004) to average only 4 percent for the next two quarters! It turned out to be twice that rate.

In 2008, perhaps the RBI noted its erroneous ways and started forecasting higher GDP growth for the great crisis year of 2008/9. At the peak of the crisis (July 2008), it forecast GDP growth of 8 percent. A month later, year on year industrial production was reported to be negative – the very first negative number in the developing world, suggesting that the great Indian slowdown of 2008 was almost entirely a home-grown affair (note that the world collapsed a full three months after the Indian collapse and after Lehman in September).

The inflation forecasts are no better, and in many respects shockingly worse. [That this might have something to do with the deeply flawed quantity theory of money model that the RBI uses has been commented upon ad nauseum in these columns]. The data are from quarterly reports of the RBI. In end January 2009, which is two months before the target of the forecast (March 2009), the RBI’s considered assessment was that year on year WPI inflation would be 3 percent. At that time, the WPI index was 229.6 and the March 2008 WPI figure was 225.5. A 3 percent year on year increase would mean an index level of 232.3 in March 2009. Which means that in just two months the RBI was expecting the index to rise by 1.2 percent or close to 7 percent at an annual rate. (If seasonal factors are incorporated into the exercise, which they should, but which the RBI adamantly refuses to incorporate into its thinking, the “performance” would be worse). This when the world was rightfully talking of the genuine possibility of a second great depression worldwide.

Maybe the RBI will be right this time; and maybe only the RBI will be right and the rest of the world wrong. Maybe. It is equally possible that we need to assess the RBI forecasts by a different yardstick, namely not research but ideology. Consider for a moment that the RBI belongs to a strict monetarist school and only looks at the quantity of money supply. Consider also that as a central banker it believes in always erring with tightness. Consider also that its ideology prevents it from being open-minded about different explanations for economic phenomena. If so, then the RBI will act exactly as it has acted.

Unfortunately for India, this is not a defunct economist’s debate. Monetary policy should not be a domain for idle researchers/policy makers/commentators to have “fun”, or for some feudals to dictate policy. What the RBI does affects policy on interest rates, and interest rates affect the nation’s economy and even the poor. Dr. Subbarao complained about bad fiscal policy in his policy statement (ironically, until a year ago, he was making the same fiscal policy). It is hoped that as part of dissension (which he is unlikely to receive from within) Dr. Subbarao will accept the following – the reason that fiscal policy is expansionary in India, more than it needs to be, is precisely because he and the RBI cannot be trusted to do a good job on monetary policy. Fiscal policy has to masquerade as monetary policy; very easily, monetary policy can be less tight and fiscal policy more. But that is hoping for Godot – or for dissension within the RBI.