Statistics, perplexing statistics, missing statistics
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Despite its mathematical base, statistics is as much an art as it is a science,” wrote Darrell Huff in the book, How to Lie with Statistics, published in 1954. To be able to accurately calculate, as well as interpret, statistics helps in understanding the health of the economy and deciding on the right policies.
In the first Monetary Policy Committee meeting of the Reserve Bank of India (RBI), one member said, “…upside risks to inflation… particularly arising out of the award of the 7th Pay Commission, are largely statistical...” It is hard to understand what the meaning of ‘statistical’ was in this context. Maybe it was meant as a one-time effect. If true, does that mean anything which does not happen yearly should be ignored?
Inflation, unlike what is commonly believed, is not due to inanimate objects like food or fuel. This is because every object around us has its origins in the earth, which does not charge money for it. It is the farmers, miners and workers who need to be paid and the investors who need a return on their capital that affects inflation.
A classic example of the link between wages and cost of capital is visible in India when one looks at the average cost, including cost of Employee Stock Option Plan (ESOP), between an employee of a public sector bank (State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank and Bank of India) and that of a private bank (HDFC Bank, Axis Bank and ICICI Bank).
According to data from investment bank, Spark Capital Advisors, on an average, a public sector bank employee was paid 27% more than an employee of a private sector bank in financial year 2016.
Apart from this, according to this data, while the average cost of an employee for the private banks, including ESOP expenses, rose by 7.4% per annum between FY10 and FY16, it went up by 10.9% per annum for the employee of the public sector banks. And since such banks offer one of the lowest rates of lending in India, such a growth in employee costs impacts the cost of capital for borrowers.
This effect is not restricted to the banking sector; the same is observed in the average cost of a railway employee, which has risen 11% per annum (FY10-16) or in the case of State Transport Undertakings (STU), where it has risen 12% per annum (FY10-15). Given these services are at the bottom of the price curve, their effect is pervasive. Ignoring wage inflation, therefore, would lead to erroneous conclusions.
One can argue that such inefficiencies get competed away in the market place. That is true, provided there is ample competition. Without competition, companies end up either rewarding the ‘providers of labour’ or the ‘providers of capital’ at the cost of the customer.
Let me now give an example of a ‘perplexing statistic’. The central bank releases a quarterly statistic which is called OBICUS, or Order Book, Inventories and Capacity Utilization. The latest reading on capacity utilization is 72.7%, and this has been around the same level for five quarters. This means that nearly a fourth of the capacity is lying idle.
At the same time, the index for industrial production (IIP) has barely budged from 184.3 (average for 2015 September quarter end) to 184.8 (average for 2016 December quarter end). The low utilization is attributed to ‘lack of demand’. However, is it not true that the ‘lack of demand’ is itself a result of constraints in the economy?
The reason these constraints, which affect demand, do not show up in the above statistic is because of a simple phenomenon observed when measurements are made—that which can be measured gets measured, not necessarily that which should be measured. It is easy to figure out the capacity utilization of factories, but those are a small part of the economy. The total capacity of an economy is, in fact, the sum total of its goods producing capacity, its services capacity and its human capacity. While one is easily measured, the other two are not.
So, how does one measure, say, the logistics capacity of a country, education, construction capacity, health care, government and regulatory capacity? These measurements are difficult to calculate but still important. Unless the real capacity bottlenecks are identified and corrected, growth will remain elusive.
That brings me to a ‘missing statistic’. One of the glaring gaps in Indian economic statistics is related to housing. In India, there are no reliable estimates of housing stock, starts, or sales, which are common in many other countries.
A home is a basic economic unit, as it gives meaningful insights into investments and consumption trends in the economy. Owning a home for a citizen is like becoming a shareholder of the country. Even though every home is registered with the local authorities in India, there is no comprehensive data base available to study this data.
Statisticians of our country should embrace the challenge of providing accurate and complete data. The job is not easy. But it needs to be done.
Huzaifa Husain is head-equities, PineBridge Investments, India