Index and labels: How Economic Survey plans to bring certainty in policy

The Economic Survey 2018-19 made a case for reducing what it calls ‘economic policy uncertainty’ in India, by making policy and rules more predictable and stable, properly documenting the implementation of policy, and following an ‘economic policy uncertainty index’.

However, the above-mentioned index seems somewhat problematic.

“While economic uncertainty stemming from uncontrollable factors remains beyond the control of policymakers, they can control economic policy uncertainty. Reducing economic policy uncertainty is critical because both domestic investment and foreign investment are strongly deterred by increases in domestic economic policy uncertainty,” said the Survey in the chapter titled How Does Policy Uncertainty Affect Investment?”

The Survey stated that while India had secularly decreased domestic economic policy uncertainty since 2012 and had been exceptional in reducing this uncertainty since 2015, policymakers needed to double down on reducing domestic economic policy uncertainty even further.

The Survey gave some recommendations on how this could be done. It said top-level policymakers should ensure their policy actions are predictable, provide forward guidance on the stance of policy, and reduce ambiguity in policy implementation. “To ensure predictability, the horizon over which policies will not be changed must be mandatorily specified, so that investors can be provided the assurance about future policy certainty,” it said.

“The government could also use labels such as ‘Standstill’ versus ‘Ratchet Up’ to categorise various categories of policies, according to the level of commitment about future certainty that it can provide,” it said.

It also said that the economic policy uncertainty index must become an important index that policymakers at the highest level monitor on a quarterly basis and that the government must encourage construction of economic policy uncertainty sub-indices to capture economic policy uncertainty stemming from fiscal policy, tax policy, monetary policy, trade policy, and banking policy.

However, this is where a problem arises. By the survey’s own admission, the economic policy uncertainty survey that it suggests usage of is based on newspaper articles and certain keywords they carry, making it an incomplete exercise. 

The index reflects frequency of articles in leading newspapers that contain the following triple: ‘economic’ or ‘economy’; ‘uncertain’ or ‘uncertainty’; and one or more of policy-related words ‘fiscal policy’, ‘monetary policy’, ‘PMO’, ‘Parliament’. 

Other terms for ‘policy’ include ‘regulation’, ‘deficit’, ‘legislation’, ‘reform’, ‘central bank’, ‘RBI’, ‘Reserve Bank’, ‘finance ministry’, ‘policymakers’, ‘finance minister’, ‘lawmakers’, ‘Planning Commission’, ‘economic advisor’, ‘Prime Minister’s Office’, ‘PM Office’, ‘Prime Minister’s Economic Advisory Council’ and other similar words.

“Only those articles that have words from all three categories are counted for measuring economic policy uncertainty,” the survey said. 

The chapter also recommends that policymakers must also focus on quality controls while implementing economic policy. “The actual implementation of policy occurs at the lower levels, where ambiguity gets created and exacerbates economic policy uncertainty. As organisations in the private sector compete and seek the highest level of quality certifications, government departments must be mandated to similarly seek quality certifications,” it said.