As the government responds to the challenges posed by the economic slowdown, there’s an ignored area of reform, where simple measures could have potentially big payoffs. This area relates to data, specifically the process of generating and disseminating reliable data.
Reliable data is important for several reasons. For some time, we have known that confidence — in the economy and government — is critical in shaping private actions. Keynes himself stressed the importance of “animal spirits” in getting entrepreneurs to invest. Others have stressed the importance of consumer confidence in getting households to spend on durable goods such as cars. There is something of a bootstrap effect at work: Confidence can change behaviour, which changes reality, and hence confidence.
Accurate data is arguably even more important for guiding government actions. Consider the following policy questions facing India today: Does the economy require little support, a reasonable amount, or urgent and massive measures? Is there really an employment problem? Has poverty come down or gone up? Do poor government revenues simply reflect a deep economic downturn — or serious collection problems, requiring urgent measures to improve tax administration? Is there no room, a little room or considerable room for expansionary fiscal policy? Has the financial system turned the corner — or are stressed assets actually rising?
All these are serious questions confronting policymakers right now. Yet the data are simply not reliable or incontrovertible enough to allow them to be answered with any degree of certainty. And that makes it difficult to formulate policy responses. In some cases, we don’t even know whether a response is needed.
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Accordingly, the government’s immediate task is to re-boot the data systems in three sectors: Real, fiscal and financial.
On the real sector, measurement of GDP, employment, and consumption have all proved problematic. To remedy this, the government should set up a committee, perhaps under the leadership of Nobel Prize winner Professor Abhijit Banerjee, who knows and cares deeply about these issues. This committee could be asked to address two sets of problems. Its forward-looking task would be to propose improvements to data collection and statistical methodology, which could be implemented in conjunction with the planned updating of the base year. To do this, its backward-looking task would be to identify the problems in the GDP estimates and the PLFS/NSSO surveys. This difficult task will require the assistance of the professional economic community, which in turn means that the unreleased surveys should be published.
On the fiscal accounts, the government should use the next budget as an opportunity to present a revised and cleaned-up set of fiscal accounts, allowing it to put behind the problems of the last budget. The aim should be to clean up not just the flow (deficit) numbers but also the stock (debt) numbers. Particular attention should be paid to identifying — and paying — arrears to suppliers.
In this effort, the government could build on some work already done. The Comptroller and Auditor General (CAG) in its recent report set out a rigorous accounting methodology, especially for taking off-balance sheet transactions into account. The previous secretary of the Department of Economic Affairs, Subhash Garg, has also made some very useful suggestions in this regard.
Once a sound budgetary accounting system is created, it needs to be institutionalised. Perhaps the best way to do this is by creating a Fiscal Council, as proposed unanimously by the NK Singh FRBM Review Committee. Such a council could help ensure that the accounting framework is being followed and the budget projections are realistic, based on reasonable forecasts for GDP and tax buoyancy. Of course, the Council needs to be designed so that it does not undermine the sovereignty of the executive and legislature. This could be done in several ways, for example, by ensuring that its members include the chairman of the Finance Commission, a representative of the CAG, and a representative of the GST Council, such as a finance minister from one of the Opposition states, as well as respected experts outside government.
On the financial sector, given the recent credit bubble and the series of problems, involving so many financial institutions, the time is ripe for a second Asset Quality Review (AQR). A regulatory system that failed to spot, let alone head off, the spate of problems from Nirav Modi to Punjab and Maharashtra Cooperative Bank to Dewan Housing and NBFC financing of real estate, and, above all, the behemoth that we have now discovered IL&FS to be, has to work extra hard to regain trust, and transparency about stressed assets will be an essential pre-requisite for that effort.
A new AQR — perhaps even led by a former RBI Governor — will allow the government and the RBI to assess the precise magnitude and sectoral nature of the problem, thereby facilitating better-tailored and better-designed policies to solve the problem. It should cover not just the NBFCs but also the banks, which are experiencing renewed stress from the real estate, steel, power and telecom sectors.
Driving a car requires considerable information: A good speedometer, data on whether the fuel tank is empty or full, gauges of tire pressure etc. Running an economy, especially one that is in a predicament such as India’s today, is infinitely more complicated and the data demands are hence commensurately greater. A Data Big Bang effort along the lines proposed here would make that difficult task less challenging.
This article first appeared in the print edition on December 10, 2019 under the title ‘A Data Big Bang’. Subramanian is former Chief Economic Adviser to the Government of India and Felman is former IMF Resident Representative to India.
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