The Bhutanese Leading the way.
However, Finance Minister still defensive about NSB calculation
On 23 June 2023 before the deliberations on the Annual Budget of 2023-24, the Economic Affairs Committee (EAC) of the National Council pointed to a story done by The Bhutanese Newspaper on 10 June 2023 titled ‘How we could be underestimating real inflation,’ which pointed to flaws in our inflation calculation and how we are underestimating it.
The EAC committee in its recommendation said, “A recent report in The Bhutanese Newspaper has shown that due to to flaws in the method of calculation and inconsistent weightage given to commonly consumed goods and services, Bhutan may be underestimating the inflation rate.”
“For example, the paper pointed out that based on the current weightage system Bhutanese people spend only 11.57 percent of their income on house rent, house utilities like power and water bills, household equipment and maintenance,” the EAC added.
It further said that considering that inflation is an important macroeconomic parameter used to calculate everything from real income at the household level to real GDP growth rates at a national level, we cannot make such errors.
“Therefore, The National Council would like to recommend the government to direct the National Statistics Bureau (NSB) to reexamine the method of calculating inflation to correct any anomalies and ensure that the calculation reflects the economic reality in Bhutan rather than just following international methods that may not apply to Bhutan.”
The EAC member and Pemagatshel NC Jamyang Namgyal pointed out saying that in the 2023-24 budget the inflation has shown to have come down compared to the 2021-22 budget by 2.3 percent. He said he has his doubts.
He said there is a doubt that inflation is being underestimated.
“The committee feels this is not adequate (inflation calculation) and last time on the 10th June a newspaper called The Bhutanese did very good research on this. For example, our house rent and utilities and maintenance is shown to be only 11.57 percent only. However, when we looked around in towns and villages and talked to people this is not the reality as the the lowest rent is around 30 percent. Some may pay rent higher than their income. There is a lot of concern also that due to the upcoming pay hike the the rents and other commodities would go up,” added the MP.
On 27 June 2023 the National Council voted unanimously with all 23 present voting yes on the recommendation to the government to direct the NSB to reexamine the method of calculating inflation to correct any anomalies and ensure that the calculation reflects the economic reality in Bhutan and just based on following international methods that may not apply to Bhutan.
Then on 29 June 2023 the same recommendation was presented to the National Assembly which also passed it.
Finance Minister defends NSB inflation data
While the Finance Minister welcomed the NC recommendation in the NA on 29 June he took a much more defensive stance on 30 June 2023 of the NSB’s method of inflation calculation during the meet the press.
The reporter asked the minister on his thoughts about inflation getting underestimated and in this article has also fact checked his replies.
Lyonpo said, “I think there is no separate formula being adopted in any country as there is a standard formula based on the CPI. While calculating inflation it is not really tracking the price of commodities but gauging change in prices over time.”
The minister’s claim is misleading as there no such thing as a ‘standard formula.’ Every country can choose its own list of commodities and the weightage to be given to each one based on local consumption. Each country has it own unique CPI. For example, Japanese CPI excludes fuel.
To really calculate inflation well one must have the most representative items consumed and not the widest number of commodities as is the case in Bhutan.
The minister said there are only 113 items and 314 varieties of these items and the reporter has misreported the 314 varieties as items. He said an item is a rice but varieties could be red and white rice etc.
The reporter deliberately mentioned the 314 varieties as commodities as there are separate scores and weightages attached to each of the 314 varieties. The misleading allegation of the minister does not take into account that both red and white rice have different prices and so are different commodities. In statistics once anything is given scores or separate weightage then it cannot be discounted especially when these scores add up to give the final figure.
The minister said the items for CPI basket according to NSB are selected and reviewed after every five years based on the BLSS survey and the weights are derived from the consumption pattern of the Bhutanese and are determined using the amount being spent on each item.
However, the problem with the minister’s statement here is two fold. If BLSS is the basis of CPI then the question needs to be asked if the BLSS has asked the relevant and right questions for CPI which is not necessarily the case. The second issue is that BLSS in the absence of certain data has created its own rent levels which is not the market rate and is the wrong value.
On the question about how Bhutan’s inflation is lower than India when almost everything is imported from India with additional costs, the minister said while determining inflation, CPI is not only a measure of price level but it is also a measure of a price change over a period of time.
Therefore, he said it is not necessary for Bhutan to have price increases higher than India.
Here the minister’s explanation does not take into account that in Bhutan not only is the price level higher than India but also the rate of increase of the price is also higher than India due to this higher price level.
For example, a kilo of rice may be Nu 25 in India and after a year it increases to Nu 30, but in Bhutan the same kilo of rice which is Nu 30 will increase to Nu 38.
The Nu 5 increase in price in India when coming to Bhutan will be Nu 8 due to higher transportation cost, traders margin, taxes etc.
If the minister’s theory of prices being lower in Bhutan than India is right, then goods should be flowing from Bhutan to India and not vice versa.
The minister said the CPI basket actually constitutes 54 percent imported items and 46 percent domestic items and therefore given the inclusion of domestic items into our CPI basket such as services like telecommunication, transportation, education etc and the seasonality the inflation of Bhutan need not be higher than India.
Here, it must be pointed out that real inflation is not driven by the number of items, but by the weightages attached to items. There could just be 20 items with 40 percent weightage that is driving the price.
When it comes to the local 46 percent commodities, most of them are more expensive than in India like rent, food price, telecommunication, locally manufactured products, transportation etc.
In fact, goods produced in Bhutan are so expensive due to higher labour and other costs that even after Indian goods face tariffs they are still as competitive as Bhutanese goods. The only thing cheaper in Bhutan that is produced by Bhutan is electricity.
The minister then said, “The third part of your question is inflation data mismatch impacting the GDP data mismatch. On this the per capita GDP is calculated based on the current prices reported by the producers of goods and services. Therefore, the GDP is based on producer price index and not necessarily on consumer price index. This is my understanding based on discussion with my technical colleagues with NSB.”
The minister’s statement, however, does not take into account that the calculation of GDP by whatever method is impacted by CPI index.
The reality of Bhutan’s economy is that producer price index is not really applicable to Bhutan as Bhutan does not produce much goods but imports the vast majority of them.
The only places where the producer price index can be applied in Bhutan is in our production of cement, hydropower and a few industrial goods.
Around 90 percent of our trade is with India and we import around 70 bn worth of goods which has nothing to do with producer price index. Most of our things are exchanged and not produced and so much of our GDP calculation is impacted by the price of goods.
The Finance minister said in the CPI basket there is a food component and non food and while food is updated monthly non food is done on a quarterly basis. Talking about the inconsistency of rental data he said rental is under non food and he agreed it cannot be generalized over a period of time with the changing context and price getting varied.
The minister is contradicting himself here as the BLSS is done only once every five years and so how can that be updated every month except for the prices.
The minister said, “Yes, BLSS has some flaws and is updated on five yearly basis. On the frequency of data in our macro economic framework files I do agree with you that maybe it is not only in Bhutan but every where else even in India and other developed countries where there will be inconsistencies as data is not based on census but extrapolation. Probably due to that our sample size is quite small and there will be small flaws but we will try and look into it.”
Here the minister’s statement presumes to know about data in other countries but it is a reach to be an authority on data in other countries or even compare Bhutan to them.
The simple solution for Bhutan is that the number of commodities needs to be reduced and made more representative and the weightages needs to also be changed to reflect the economic realities.
As far as the reliance on BLSS is concerned the 2017 BLSS report failed to find out the income of the people. The expenditure was showing to be 33 percent higher than income when both income and expenditure should be related. This shows that there are flaws with the BLSS itself.
While both the NC and the NA passed the recommendation asking the government to direct the NSB to improve its inflation calculation the mainly defensive stance taken by the Finance Minister indicates that nothing may change. The stance by the minister shows that NSB and the minister wants to justify NSB as being right and don’t want any change.
In a curious development and as part of the reforms the NSB was placed under the Center of Bhutan and GNH Studies (CBS) as part of an executive order, but within less then a month the NSB was transferred back out.
It seems that hectic lobbying went on behind the scenes to reverse the decision.
What the NSB comes out with also features in the Budget report of the Finance Ministry and NSB’s many projections give a state of the GDP and economy.
Background
The Bhutanese in its 10 June story found that two things may both end up suppressing the real inflation rate faced by people. The Consumer Price Index (CPI) is calculated using 14 major items of consumption which further consists of 314 commodities or varieties divided among them.
Firstly, there are too many commodities at 314 which are all assigned average scores of weightages. The problem is that when there are too many commodities measured then it can push down the inflation rate.
For example, most Bhutanese would spend money on essential food items, rent, transportation and other miscellaneous expenditure like data, junk food, entertainment etc.
If your expenses go up in the above areas, then it really hits your budget. However, when hundreds of items are added which you either don’t use or use rarely then it can distort and dampen the real impact of inflation.
A large country like India measures only 299 commodities which are assigned scores.
The other problem is the weightages given to commonly consumed goods and services within these 14 major items (consisting of 314 measured commodities) may be flawed.
Each of the 14 major items are commonly consumed items and a weightage of 100 percent is divided among them. However, a lot of the weightages does not make sense to an ordinary consumer. For example, this weightage system claims that people spend only 11.57% of their income on house rent, house utilities like power and water bills, household equipment and maintenance.
The flaw in how your rent and utilities get such a low theoretical score is due to the fact that the CPI weightage is derived from the Bhutan Living Standard Survey (BLSS) of 2017 conducted every five years. The BLSS data is flawed as instead of an actual survey it assumes that people play only Nu 1,638 per month rent for a two story Bhutanese house in rural areas. The low rural rent average then drives down the total national rent when combined with the urban data.
Communication which is mobile calls and internet data is put at 3.25% but many Bhutanese will know that in fact a much bigger chunk of their income goes into this. The low weightage on rent means that even if rent goes up it is not adequately captured in the inflation data.
Another issue is that a huge chunk of Bhutanese inflation is imported from India from essential items like rice and cooking oil to junk food and cars.
In fact, inflation in Bhutan should be higher as the commodity coming from India will have to bear transportation charges, loading and unloading, taxes, wholesaler’s margin and retailers margin and so it is much more expensive when it reaches here.
However, Bhutan’s April 2023 inflation rate is 3.29% lower than India’s April 2023 inflation rate of 4.7%.
Bhutan’s flawed inflation data shows our real GDP and per capita income to be better than it is and hides the real economic pain faced by people.
