A case for demystifying economic data

Microeconomics or Macroeconomics — which one is more important and relevant? This discussion often comes up in academic circles. This article doesn’t intend getting into this debate; suffice to say that both are important and relevant in their own ways, and are inter-related.

Broadly speaking, Microeconomics deals with individuals and firm level decisions, and is arguably relatively more quantitative and definitive. As compared to this, Macroeconomics does aggregate level analysis of various variables and their relationship, relies on a number of assumptions and factors which may or may not be amenable to precise quantification, and is more abstruse. Macroeconomics got into prominence in the post Keynesian era and in some sense continues to be an evolving field.

Microeconomic issues provide a reality check to the individuals and firms on a day-to-day basis, and they have little option but to be alert to these issues. Macro issues are of overarching nature and set the tone of overall economic environment. Though the macro issues may not immediately affect any individual, by their very nature, they attract the attention of everyone in society and public discourses on these issues are quite common.

Such discussions gain more prominence when the economy is not doing well or is passing through a difficult phase. This is a global phenomenon but let’s stick to the Indian scenario.

Of late, the discussions on topics like GDP, inflation, unemployment, fiscal deficit, current account deficit, etc. have become ubiquitous in public life — be it in print media, electronic media, social media or even drawing room conversations.

While many of such discussions often turn into heated debates, including international comparisons of all sorts, it is doubtful whether the discussants are aware of the assumptions made or methodology used in computing various macro numbers on which they are basing their arguments. Part of this callousness emanates from the feeling that ‘everyone’s problem is no one’s problem’.

Listening to some of the public debates and discussions, one wonders whether there is even any need for an expert advice in such matters any longer! More on ‘experts’ later.

The case of inflation

Take the example of ‘inflation’. The prevalent high inflation is a cause of worry worldwide. Many commentators compare inflation in India with the figures elsewhere — self congratulating that inflation here is much less than that in many developed jurisdictions like the US and Europe.

Now, there are different categories of inflation indices, computed for different purposes, and there are different modes of computing them. The CPI numbers used for inflation targeting by RBI, as released every month by the Ministry of Statistics and Program Implementation, give the percentage change in the CPI that month over the same month of the last year (for example, January 2022 over January 2021).

Other countries might use different type of inflation indices and may compute them differently. Different countries’ indices would have different product baskets, constituents’ weights and structural adjustments.

As compared to the year on year (y-o-y) comparison as used in India, an alternative approach could be a month on month (m-o-m) comparison (for example, January 2022 over December 2021). The former approach may suffer from base effect bias and the latter on account of seasonality factors.

Naturally, comparing the inflation rate in India with that of the US is not an apple to apple comparison. Also note that while inflation targeting is statutorily mandated for RBI in India, there is no such legal mandate for Fed in the US. Further, given the huge difference in the average per capita incomes in the two countries and the income disparity, impact of rise in inflation on the people at the margin in India is much more severe.

Macro experts

Now coming to the experts working in the field of macroeconomics. There are institutions, including public institutions, which periodically release figures of various macro indicators as also make the future projections.

Then there are a number of economists/experts who make their living out of this activity.

Increasingly, these institutions and experts seem to using the ambiguities and jargon, so typical of macroeconomics, to their advantage. Their numbers, which many of them come out with even up to two decimal places to show their false confidence, keep changing all the time.

Surely, many exogenous or unpredictable factors like geo-political situation, international oil prices, US Fed actions, monsoon, etc. are relevant. But then state the ‘disclaimer’ prominently and be tentative in what you are conveying rather than narrating it as a gospel truth. One hasn’t heard of any individual losing his/her job for making wrong projections!

Compare this with the reporting of firm level financial performance and projections for future. Heads would roll and responsibility fixed for mistakes. Recall the severe criticism and the regulatory action credit rating agencies had to face when they failed to timely predict the default by a major NBFC in 2018. Or take the example of a household monthly budget management of an average lower income group family — irresponsible assumptions could lead to serious livelihood issues.

Even some of the traditional concepts used in macroeconomics are mystifying and could rather be stated simply and objectively. For example, though expressing government fiscal deficit as a percentage of the GDP is a well-established practice, why not also state fiscal deficit as a percentage of the total budget size so as to make the figure easily discernible? Note that a rise in inflation, besides increasing tax revenue also increases nominal GDP, thereby making the fiscal deficit to GDP ratio look relatively rosier. Some benefit of rising inflation!

Politicians might have their own reasons and compulsions to quote the macroeconomic figures which suit the situation without necessarily going into the assumptions made in computing them.

However, it would be totally unethical on part of the institutions or experts to hallucinate or run their imagination wild and come out with macro numbers without doing a thorough analysis, disclosing assumptions made and giving a proper disclaimer. After all there is something called ‘reputational risk’!

The writer is a retired IAS Officer and Ex- Chairman SEBI

Published on

September 18, 2022

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