Mumbai, Jan. 24: The Reserve Bank of India (RBI) is likely to put in place an early warning system that will raise the red flags on trouble spots within the economy sooner than today so that nimble policy responses can be taken to deal with them.
A technical advisory committee, which is undertaking a review of all the economic indicators that require closer monitoring, has suggested that the inputs that feed into the GDP quarterly estimates and the Index of Industrial Production (IIP) should be tracked on a quarterly or even a monthly basis.
The central bank had appointed a committee headed by executive director R.B. Barman to look into the possibility of developing leading economic indicators based on appropriate methodology and international best practices to monitor movements of the Indian economy on a regular basis.
The Reserve Bank is under pressure to come up with a set of leading indicators to make credible forecasts about economic growth and business cycles, especially after raising concerns about an overheated economy and the resultant surge in inflation which has now climbed to 6.12 per cent — way above the forecast of 5 to 5.5 per cent for this fiscal.
The report said there was a need to monitor variables like housing starts, housing price index and plant capacity utilisation, which are not compiled at present.
Housing starts are a key indicator of business cycles in the West; it’s also an area that has the Reserve Bank worried because of the way banks have been shovelling credit into the sector and the real estate speculation that has sent prices to crazy levels in the metropolises.
The group also felt that the RBI needed to keep tabs on other important indicators like employment, wages, sales, order books, inventory, savings and investment. It felt that information on these should be compiled at least at quarterly intervals to capture “the turning points in the economy”.
India lags behind some of the developed economies who use indicators like new dwellings among others.
Calling for the construction of a Composite Index of Leading Indicators (CILI), the group said this was necessary from the viewpoint of forecasting business cycles, particularly its turning points.
This is particularly important for monetary policy as correct forecasting of turning points could facilitate appropriate actions to counter overheating or excessive downturns in the aggregate economic activity.
Though the gross domestic product (GDP) could be adopted as the reference series, as it represents almost all aspects of the economic activities, the group observed that it is not ideal in the Indian context .
This is because agriculture, which is a crucial component of GDP, is highly dependent on monsoon performance.