Incorrect data undermines analysis and policy

Capitalism is facing multifaceted challenges due to the problem of policy-making based on incorrect data. Governments and international agencies like the World Bank that depend on faulty official data cannot correctly analyse and help resolve the problems facing the world and its poor.

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AT a recent corporate sector conclave, political and corporate heavyweights stressed that the economy needs to grow at a sustained rate of 8 percent. All agreed that this requires a big increase in private investment. A top government official said, "We have been at the cusp of this big private sector capex boom for the last two and a half years. It is time we did it." In other words, a turnaround in the economy has not happened over the last few years.

It was further said that only three–four large groups have increased investments. The rest were exhorted to also boost investment.

It was an admission that the economy has not been doing as well as officially projected. It was accepted that only a few large conglomerates have increased investment. They are the ones favoured by the government. This kind of cronyism has held back the rest of the corporations.

This is not all.

Investment depends on demand. The Reserve Bank of India's data suggests that the corporate sector's capacity utilisation remains low because overall demand has stagnated or declined. The demand for luxury items has indeed risen, but that for day-to-day items has declined. The implication is that while the well-off are earning and consuming more, the vast majority are forced to reduce their consumption due to loss of incomes, consequent to job losses and a high level of inflation.

International agencies' projections

The World Bank's recent report, 'Falling Long Term Growth Prospects' points to a decline in the growth potential of the world economy. It suggests that the decade of the 2020s will be the 'Lost Decade'. It points to anaemic growth since the global financial crisis of 2007–09 and a further slowdown post the pandemic recovery in 2022. It is argued that developing and emerging market economies of Asia will lose steam due to various factors unless reforms are carried out. Thus, global conditions for boosting the Indian economy's growth seem to be bleak.

Can such predictions be relied upon, especially when they pertain to India? Clearly, they depend on the reliability of the available data.

The World Bank does not collect primary data and relies on data made available by member countries. Thus, errors in official data plague the data used by the World Bank. This not only impacts the analysis but also the predictions and the reforms suggested by the World Bank.

Also read: 2021-22 Q1 GDP data overestimates: Economic shocks question methodology

Errors in data

India's database is supposed to be one of the most extensive among the developing countries. But it is plagued by both inadequacy of data and erroneous methodology. The result is large errors in the official Indian data. Similar problems exist for the data from other developing countries, which puts a question mark on the World Bank's analysis.

If the errors in data and the methodology remain the same all through the period, the official data could possibly act as a proxy for the actual data. But such an assumption would not hold when there are structural changes in play, as has happened recently due to the pandemic and the Russian war on Ukraine.

Such huge shocks change the various parameters of the economy. So, both data collection and the method used to estimate and project macro-variables need modifications, especially in developing countries. Such changes have not been carried out by the agencies in charge of collecting data and analysing it.

Therefore, World Bank predictions are based on macroeconomic variables that have substantial errors.

The Indian case

Consider the Indian situation. Demonetisation and the Goods and Services Tax impacted the organised and the unorganised sectors differently. The former has been growing, while by all accounts, the latter has been declining. So, the method of estimation of income using the organised sector data to proxy for the unorganised sector becomes invalid. This leads to errors in estimation of all macro-variables, such as national income, investment and consumption. They are overestimated. The pandemic further impacted the unorganised sector more adversely and created additional errors.

If the non-official evidence available on the declining unorganised sector is taken into account, the Indian economy is not growing at around 6–7 percent, as officially claimed, but is stagnant or declining. So, India is not the fastest growing large economy, as officially claimed— official data does not capture the reality.

Also read: Rising national income but declining welfare of people

According to current International Monetary Fund projections, advanced economies are likely to grow only at 1 percent, and most of the world economy's growth will be fuelled by the developing countries.

In effect, the projections by these international agencies depend largely on the organised sectors of the world economy, which then does not capture the reality faced by large numbers of the poor. The reality is also going out of line with growth data due to environmental damage and extreme weather events. But that is an issue for another article.

Inadequate demand and slowing growth

Employment is hardly rising, and even declining in parts of the world due to automation. Technology is displacing labour not only at the lower skill levels, but also skilled workers due to the greater use of artificial intelligence. This is causing the dependency ratio in the family to rise, increasing family poverty.

Further, inadequate demand also impacts the organised sector's growth. The World Bank's projection of a decline in growth is in line with this, and will aggravate unemployment and increase instability in the world economy. Former US President D.J. Trump was not the only one exhorting US capital to return home, current US President Joe Biden has given the same call. The argument is that supply chains need to be shortened post the experience of the pandemic and the Ukraine war.

The World Bank's solution to the demand problem is 'universal basic incomes' (UBI). But that is a palliative and not a solution. Moreover, it goes against capitalism's principle that you only pay for work done, not for work not done. So, UBI is an admission of an irresolvable crisis of capitalism.

Further, reforms suggested by the World Bank would promote the organised sector of the world economy since they are based on marketisation and financialisation. They are not at all a solution since the problems are emanating from the unorganised sector and poverty.

Rising instability 

The differential movements within economies and the world are leading to rising inequality, which aggravates the demand problem that in turn slows down growth and investment. This goes on to build pressure to stimulate investment by granting more concessions to businesses. A vicious cycle of rising disparity and further aggravation of the demand problem is created.

Also read: Union budget 2022-23: which of the inequalities will it impact?

Central banks have been mostly keeping interest rates low to stimulate investment. This has often led to excessive borrowing and debt. Banks lent indiscriminately which, in 2007, resulted in the subprime mortgage crisis. In 2012–13, to reign in liquidity, there was quantitative easing, which hit the Indian economy that was just recovering from the global financial crisis.

The pandemic led to collapse of production. To prevent a depression, globally there was massive infusion of liquidity and near-zero interest rates. The result was a rise in borrowings for financial investments and not in real production (since demand was low).

As the pandemic waned, due to business closures, supply bottlenecks appeared, resulting in unprecedented inflation. This forced central banks to substantially raise interest rates. This has resulted in the collapse of banks like the American state-chartered commercial bank Silicon Valley Bank and global investment bank Credit Suisse. In spite of quick government interventions, the banking crisis is persisting.

Capitalist dogma leads to fault policy

To sum up, capitalism is facing multifaceted challenges due to the problem of policy-making based on incorrect data. For instance, in the Indian case, a recent research paper argues that poverty and inequality declined during the pandemic. So, is the pandemic to be welcomed? The conclusion is based on faulty data.

Also read: Search for alternative development path: Relevance of Gandhian thought

Often, governments and official economists act as propagandists and instead of presenting the reality, paint a rosy picture. They then become victims of their own propaganda and propound inappropriate policies.

Governments and international agencies like the World Bank that depend on faulty official data cannot correctly analyse and help resolve the problems facing the world and its poor. The World Bank and the Indian government, using largely organised sector data, cannot resolve problems that emanate from the persistently declining unorganised sector and rising inequality.