New Delhi: The Economic Survey 2019 believes that uncertainty around domestic economic policy has reduced over the last seven years, with a sharper increase from 2015 onwards, after the Narendra Modi government came to power.
In doing so, the survey endorses a third-party media coverage tool constructed by three US-based economists called the Economic Policy Uncertainty (EPU) index.
The index essentially measures the number of articles published in seven Indian newspapers – including The Times of India, The Hindu, The Indian Express and The Statesman – and creates a statistical metric.
The survey describes the EPU’s methodology as the following:
“To measure economic policy uncertainty, the index is created by quantifying newspaper coverage of policy-related economic uncertainty. The index reflects frequency of articles in leading newspapers that contain the following triple: ʻeconomic’ or ʻeconomy’; ʻuncertain’ or ʻuncertainty’; and one or more of policy related words ʻfiscal policy’, ʻmonetary policy’, ʻPMO’, ʻparliament’,” the survey notes.
Other terms for ʻpolicy’ include ʻregulation’, ʻdeficit’, ʻlegislation’, ʻreform’, ʻcentral bank’, ʻRBI’, ʻReserve Bank’, ʻfinance ministry’, ʻpolicymakers, ʻfinance minister’, ʻlawmakers, ʻplanning commission’, ʻeconomic advisor’, ʻPrime Minister’s Office’, ʻPM Office’, ʻPrime Minister Economic Advisory Council.’ Only those articles that have words from all three categories are counted for measuring economic policy uncertainty. Articles are taken from various newspapers, including, Economic Times, Times of India, Hindustan Times, The Hindu, Financial Express, Indian Express and the Statesman using access world news”
The results of this, a snapshot of which is shown below, shows that while uncertainty around economic policy peaked in India during late 2011 and early 2012 (during the ‘policy paralysis’ of the UPA-II years), it has since been declining with intermittent increases in between.
“The index…shows peaks in few months of 2011 and 2012, reflecting the policy paralysis during that period, which witnessed the problems of the high twin deficits and high inflation, thereby exacerbating macroeconomic vulnerability. The index is also high in the second half of 2013 when the economy faced the episode of “taper tantrum” leading to volatile capital flows, depreciation of rupee vis-à-vis US dollar,” the survey notes.
“The peak during GST is not as sharp, maybe due to the fact that the discussions around GST policy were happening much before it was actually implemented in July 2017. This shows that the index is picking up time periods characterised by increasing economic policy uncertainty,” it adds.
There appears to be a small, but not significant, increase in the months following demonetisation in November 2016.
Another point the survey and index raises is that while economic policy uncertainty in India moved closely in tandem with global trends until 2014, it appears to have started diverging since early 2015 and fully decoupled in 2018.
One possible explanation for this is that a few of the global economic crisis events that have occurred over the last few years have had little direct connection to India – Brexit, the US-China trade war and so on.
The relationship between decreased uncertainty and private investment however is more complicated than one might imagine.
“….There is a strong negative relationship between EPU index and investment growth. There is a correlation of (-)0.30 between these two variables (from Q1 of 2005-06 to Q4 of 2018-19). However, the relationship was weaker for some time period i.e., Q3 of 2009-10 to Q4 of 2013-14, when the uncertainty in the economy was declining and even the investment growth rate was declining” the survey notes.