Economic Sutra: Uses and Misuses of Economic Data

• 22 Jun 2023

For Prelims: Environment, Social and Governance (ESG) Norms, Sustainable Development Goals

For Mains: Role of ESG, Advantages and Disadvantages Associated with Economic Data

What is the Context?

Economic data plays a vital role in policy making by providing policymakers with essential information about the economy. It helps assess current economic performance, identify socio-economic challenges, and design effective policies.

However, challenges can arise when economic data is inaccurate, untimely, or not tailored to the specific needs of a country like India. Addressing these issues is crucial to ensure informed decision-making and the formulation of policies that foster inclusive and sustainable development.

What are the Advantages of Economic Data in Policy Making?

• Informing Policy Formulation: Economic data provides policymakers with insights into the current state of the economy, including factors such as Gross Domestic Product (GDP) growth, inflation, employment rates, trade balances, and fiscal deficits.
  • This information helps policymakers identify key challenges, set priorities, and formulate appropriate policies for economic issues.
• Assessing Policy Impact: It enables policymakers to evaluate the effectiveness of existing policies. By analysing data on various economic indicators, policymakers can determine whether their policies are achieving the desired outcomes and make necessary adjustments or reforms accordingly.
• Identifying Emerging Trends and Challenges: Helps policymakers identify emerging trends, challenges, and opportunities in the economy.
  • For example, data on demographic changes, technological advancements, or global economic shifts can provide insights into areas that require policy attention, such as skill development, innovation, or trade policy reforms.
• Monitoring Progress Towards Policy Goals: Allows policymakers to track the progress and the impacts of policy interventions. By regularly monitoring relevant indicators, policymakers can assess whether policies are on track to achieve their intended goals and make informed decisions about adjustments or course corrections.
• Facilitating Evidence-based Decision-making: Provides policymakers with objective and reliable information to support evidence-based decision-making. Instead of relying solely on anecdotal evidence or personal opinions, policymakers can utilise data to assess the potential consequences of different policy options and make more informed choices.
• Promoting Transparency and Accountability: By making relevant data publicly available, policymakers can foster a culture of openness.
• Guiding Resource Allocation: By analysing data on sectors, regions, or demographic groups that require targeted support or investment, policymakers can prioritize resource allocation and design policies that promote inclusive and sustainable economic development.

What are Some of the Examples in this Regard?

• Covid-19 Response and Stimulus Packages: During the Covid-19 pandemic, economic data played a crucial role in formulating policy responses. The government relied on data related to GDP growth, unemployment rates, and sectoral performance to design stimulus packages and support measures for affected industries and vulnerable sections of the population.
  • Data analysis helped identify the sectors most impacted by the pandemic, enabling targeted policy interventions.
• Agricultural Reforms: In 2020, India implemented significant agricultural reforms aimed at transforming the sector. Economic data, including farmer income levels, market inefficiencies, and price trends, provided insights into the challenges faced by farmers and the need for reforms.
  • The data-driven analysis helped shape policy decisions related to farm laws, market liberalization, and enhancing farmers' access to markets and technology.
• Ease of Doing Business Reforms: The Ease of Doing Business rankings by the World Bank (stopped publishing after 2021) have influenced policy decisions in India. Economic data related to factors such as starting a business, obtaining permits, enforcing contracts, and resolving insolvency guided policymakers in implementing reforms to improve the business environment.
• Goods and Services Tax (GST) Reforms: The introduction of Goods and Services Tax (GST) in 2017 aimed to simplify India's complex indirect tax system and foster economic integration. Economic data, including tax revenue collections, compliance rates, and sectoral impact, played a crucial role in designing and fine-tuning the GST framework.
  • Data analysis helped policymakers identify sectors requiring rate adjustments, streamline processes, and address implementation challenges.
• Infrastructure Development: India has been focusing on infrastructure development as a means to boost economic growth. Economic data on infrastructure gaps, investment requirements, and project implementation progress guided policymakers in identifying priority areas and allocating resources.

What are the Disadvantages Associated with Economic Data?

• Accuracy and Reliability: Economic data collection involves various methodologies, surveys, and estimation techniques. Errors can occur during data collection, processing, and analysis, leading to inaccuracies. Factors such as sampling errors, non-response (from participants) bias, measurement errors, and data manipulation can affect the accuracy and reliability of economic data.
• Data Gaps and Timeliness: There may be gaps in economic data due to the unavailability of timely and comprehensive information. Some sectors or regions may have limited data coverage, making it challenging to capture the full picture. Additionally, data may be released with a lag, which can hinder policymakers' ability to respond promptly to changing economic conditions.
• Subjectivity and Interpretation: Economic data interpretation involves making assumptions, selecting models, and applying statistical techniques. Different economists or analysts may interpret the same data differently, leading to varying conclusions. The subjectivity involved in data interpretation can sometimes result in divergent policy recommendations.
• Lack of Granularity (Details): It often provides aggregated information, which may limit its usefulness for policy formulation at a detailed level. Policymakers may require more granular data to understand specific sectors, regions, or demographic groups to tailor policies accordingly. Limited granularity makes it challenging to address specific issues accurately.
• Data Relevance and Coverage: It may not cover all relevant aspects of an economy or adequately capture emerging sectors or phenomena. As economies evolve, new industries, business models, and forms of economic activity may not be adequately reflected in traditional data sources. This can make it difficult to accurately gauge the impact of emerging trends and technologies.
• Political Interference and Biases: Economic data can be subject to political pressures or manipulation, leading to biased or distorted information. In some cases, governments may influence data reporting to present a more favourable economic situation. Such biases can undermine the credibility and integrity of economic data.
• Data Privacy and Confidentiality: It often includes sensitive information about individuals, businesses, or organizations. Ensuring the privacy and confidentiality of data while making it accessible for analysis poses a challenge. Striking the right balance between data openness and privacy protection is crucial for maintaining public trust.

How ESG Can Help in Overcoming the Related Hurdles?

• Environment, Social and Governance (ESG) norms are often used as a part of economic data analysis in policy making to assess the sustainability and long-term viability of various sectors, industries, and organisations. ESG is related to economic data used in policy making in various ways which include:
  • Alignment with SDGs: The United Nations' SDGs provide a framework for countries to address global challenges, including poverty, climate change, and inequality. ESG data can help assess progress towards these goals by providing information on environmental impact, social welfare, and governance practices.
    • Policymakers can use this data to align their policies and initiatives with the SDGs and monitor the impact of their interventions.
  • Investment Decisions: ESG data is increasingly used by investors and financial institutions to make investment decisions. Policymakers recognise the importance of attracting responsible investments that align with sustainable development objectives. By incorporating ESG factors into economic data analysis, policymakers can identify sectors and companies that are aligning with sustainable practices and encourage investment flows into those areas.
  • Risk Assessment and Management: ESG data can provide insights into the potential risks and vulnerabilities of sectors and industries. For example, assessing a company's environmental impact can help policymakers identify potential risks related to climate change or resource depletion. By integrating ESG data into economic data analysis, policymakers can identify areas that require policy interventions to mitigate risks and promote sustainable economic growth.
  • Stakeholder Engagement and Transparency: ESG data promotes stakeholder engagement and transparency by providing information on a company's impact on various stakeholders, including employees, communities, and the environment. Policymakers can use this data to engage with stakeholders, assess their concerns, and design policies that address social and environmental challenges effectively.
  • Regulatory Frameworks: ESG considerations are increasingly being integrated into regulatory frameworks. ESG data can be used to inform the development of regulations and standards that encourage responsible practices in various sectors. This can include setting emission standards, promoting sustainable supply chains, or establishing governance requirements.
• By incorporating ESG data into economic data analysis, policymakers can gain a more comprehensive understanding of the economic, social, and environmental factors that influence policy outcomes. This integration helps in formulating more holistic and sustainable policies that support long-term economic growth, social well-being, and environmental stewardship.

What are ESG Goals?

• ESG goals are a set of standards for a company’s operations that force companies to follow better governance, ethical practices, environment-friendly measures and social responsibility.
  • Environmental criteria consider how a company performs as a steward of nature.
  • Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
  • Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
• It focuses on non-financial factors as a metric for guiding investment decisions wherein increased financial returns is no longer the sole objective of investors.
• Ever since the introduction of the United Nations Principles for Responsible Investing (UNPRI) in 2006, the ESG framework has been recognised as an inextricable link of modern-day businesses.

Conclusion

The power of economic data in policy making cannot be overstated. It is both a guiding light and a double-edged sword. Recognizing the importance of accurate data collection, analysis, and interpretation is crucial for governments and international organizations alike. By harnessing the full potential of economic data and addressing its limitations, we can pave the way for evidence-based policies that drive sustainable economic progress and improve the lives of people in India and beyond. The future lies in our ability to wield economic data as a powerful tool for positive change.