Opinion
Indira Rajaraman: It pays to track popular perceptions of public policy
Summary
- Public policy needs to be viewed from the lens of those it’s ostensibly designed to serve: the people. Research shows only a few items form their view of inflation, for example, but which?
Public policy is so termed because it is done for us the people, the public. But how does it actually filter down to the public? How do people perceive what is done for them?
When Consumer Price Index (CPI) inflation dropped from 6.21 % in October to 5.48 % in November, did people perceive a decline? For the record, these monthly rates are year-on-year, based on the CPI values in the corresponding months of 2023.
To some extent the inflation decline was an artefact of the CPI values in October and November 2023 (called the ‘base effect’). But the CPI index reading did decline a touch in November 2024 relative to October. What matters is whether people experienced the reduction that the inflation index suggested.
Also read: Five years is a long time to live with 4%-plus inflation. It can leave a bitter taste.
The Reserve Bank of India (RBI) conducts a six-monthly survey of 3-month and 1-year ahead inflation expectations, termed Subjective Inflation Expectations (SIE) in the economics literature. Chetan Ghate has charted the RBI expectations survey results over the last 14 years.
The average expectation across households in the sample, hovering around 10 % over the last ten years, has consistently remained well above recorded inflation rates.
The chart shows no decline in average SIE after inflation targeting began in 2016, although there is some rough consonance between variations in household inflation expectations and movements in recorded inflation.
The purpose of having a (credible) targeted inflation rate, or band, is that economy-wide inflation expectations (FIRE, for Full-Information Rational Expectations) will converge towards the target.
Recent research results show that inflation as perceived by the public is based on a few selected products in the consumption basket, where the selected products may differ between households within a country, and of course between countries.
The narrow focus is not surprising, since people need certain products no matter how pricey they get.
In the US, gas (short for gasoline or petrol) is on top of that list. Gas increased in importance in the US post-covid, as people who had fanned out into the low-rent periphery when work became virtual found themselves travelling longer distances with resumption of in-person attendance, with gas prices rising at the same time owing to the Ukraine war.
The Inflation Reduction Act of the incumbent government didn’t show in gas prices. The party in power was voted out.
In India, the inflation perception-salient products are foodstuffs. Ever since 800 million beneficiaries under the National Food Security Act were given subsidized cereals, now free after merger with the Pradhan Mantri Garib Kalyan Anna Yojana, cereal prices no longer dominate inflation perceptions.
But supplementary foods (famously onions, but also potatoes and cooking oil) and other imperatives (milk for tea) are key determinants of inflation as it is perceived.
Inflation perception-salient products need to be identified through surveys, where respondents are asked to rank any five expenditure items of their choosing, including services such as house rental or transportation, which are their biggest inflation worries, without having to quantify anything.
People think about inflation not in terms of rates, but as increments in price levels, but even there, may not always be able to quantify the increase experienced.
These surveys cannot be a substitute for formal inflation targeting (and that should be emphasized), but they are a necessary supplement. The National Sample Survey Office could do it as a small add-on to one of its recurring household surveys.
Also read: Mint Primer | All about the inflation spike: how, why & when
Findings from such periodic surveys would vastly help the government of the day address structural demand-supply imbalances on the subjective inflation watch-list of households.
Inflation is one of the two major interfaces between RBI and the economic growth concern. The other is banking regulation and supervision. At one time, there were concerns that RBI regulation of banks was loose and enabled scams.
In response, non-performing assets were defined more stringently effective 1 April 2015, followed by diligent scrutiny of asset quality. A recent regulatory flurry, scheduled to go into effect on future dates, focuses on tightening provisioning for project finance and calculation of the liquidity coverage ratio.
There were rumblings that these would hinder growth in credit and therefore GDP.
Facing sluggish deposit growth, banks have been raising funds through infrastructure bonds for project lending. However, regulatory privileging of bank deposits continues. This suggests that banks should be scurrying to protect their deposit base.
On the contrary, depositors too found themselves in a regulatory pinch. Many were suddenly denied access to their bank accounts, because KYC (Know Your Customer) checks had become periodically necessary, with periodicities determined by the risk category of the depositor, by an amendment dated 28 April 2023 to the 2016 KYC rules.
Some depositors did receive advance intimation of the update deadline, but did not act on them because of widespread warnings, circulating at the same time, against fake requests from scamsters for KYC documents.
Bank depositors are a risk-averse lot, ready to settle for low real returns and willing to comply with all requirements specified clearly and in advance. For urban depositors, this repeat KYC was a sudden jerk.
For the rural poor with a Jan Dhan account, fingerprints erased by manual work and names spelt differently on Aadhaar and PAN cards, it is an ongoing nightmare.
Also read: Public policy education could make a better country if done right
