Using new indicators for policymaking

Over the course of the pandemic, many analysts and even policymakers have turned to using non-traditional high-frequency indicators to better understand the state of the economy. Constructing indices from these indicators that properly reflect the state of more traditional measurements like gross domestic product in real-time is more of an art than a science at this point, given the paucity of long-term data when it comes to some of these indicators.

A research paper by RBI –

• A recent research paper in the Reserve Bank of India’s (RBI’s) monthly bulletin provides some idea of the challenges that need to be overcome.
• The authors note that central banks like the Bundesbank have developed indices that provide a quarter-on-quarter rate of change in the economy.
• Of course, from 2020 onwards, multiple commercial and investment banks in India also developed resumption and recovery indices as the rate of emergence from the nationwide lockdown became of paramount interest to investors.

What does the paper suggest?

• The authors suggest several indices built out of high-frequency indicators, including railway freight loading, Google trends, and the labour force participation rate.
• The fact is that, in India, such indices will be useful beyond the pandemic economy. Even in normal times, Indian data is seriously delayed and is not provided in a timely enough manner for policymakers and investors to use effectively.
• For that matter, as the paper points out, many of the high-frequency indicators used in their suggested indices are the same as those used by the National Statistical Office to construct very early and preliminary estimates of national income.

What can be done?

• Thus, there is some solid precedent for their use as a basis for policymaking. What is needed is a larger and more reliable set of high-frequency indicators. One example of a useful new indicator enabled by technological development included in these indices is the volume of transfers under the real time gross settlement system and that of retail payment.
• As data collection and the digitisation of administration grow apace, the government should recognise that openness with this data and sharing it with the RBI and with the broader analytical community will be of great help in understanding and managing the Indian economy. The RBI naturally will need to be careful in deciding how and which indices it uses.

Way forward –

• There are also both theoretical and practical reasons for the broader markets to have access to as much information as possible to make the right decisions.
• Given the new technological tools, there is considerable hope that the vast lacuna at the centre of Indian economic analysis — delays in the release of official data — can be addressed through the use of a larger number of high-frequency indicators.
• While the RBI can use the new set of indicators and indices to better understand the economy in real time, the official statistics system could also broaden the scope of data collection and reduce the lag in their release.

Source – Business Standard

QUESTION – Using new indicators of economy may help us to better understand the state of economy, in real time, for quick and up-to-date policymaking so as to better reflect the realities of the changing economic dynamics. Comment.