The Hindu Business Line : Case for letting models loose in the North Block

Talk to them about grooming of price behaviour, projection of growth scenarios, and money as a policy, they would be interested, as much as with business cycles, debt management, exchange rate and so on.

With a collection of essays on these topics is Economic Policy Modelling for India from Oxford University Press (www.oup.com).

Editors V. Pandit and K. Krishnamurty attempt a marriage between policy framers and economists by including articles that apply "modern quantitative techniques to the meaningful analysis of economic policy, economic forecasting, and scientific quantification of economic relationships."

Among the techniques used, as the blurb puts it, is AIDS, that is, `almost ideal demand systems', apart from spectral analysis that can remind you of physics lab sessions, optimal control and coincident indicators. "Recognising one's error is the beginning of wisdom," is a quote from Sathya Sai Baba that the book cites, and it could leave you wondering if benefit of the doubt should be given to economists or babus of the North Block.

The very first piece is by Lawrence Klein, winner of the 1980 Nobel Prize in economics. He writes, "Economists are usually looking for simple answers".

Do not ignore "large multivariate systems" when deducing "appropriate interpretation of policy initiatives," Klein advises; he suspects "parsimony in scientific research" as a likely culprit.

Perhaps their kin, the accountants, too are guilty of a similar approach, in giving neat and clean opinions for a small fee, at a much micro level of economic hierarchy, though ultimately heaped with more blame when exposed than what befalls failed economists.

Klein talks of "some big surprises for policy responses in recent years" such as: "Why does the US dollar remain strong while the trade and payments deficits of the US worsen?"

That could be something he might like to revisit in the changed circumstances.

Pandit claims ours is "the earliest country to be outside the developed industrial world to be subjected to macroeconometric modelling," and I search in vain for some Kautilya reference.

Perhaps this is the explanation: "Though hardly any model has been maintained or used for policy analysis and forecasting on a regular basis, the academic input that has gone into such work has been impressive."

If jargon were a measure of sophistication, you cannot beat the economists.

For instance, EDTGOID = EDTGOI/RSUS, that is, external debt government accounts upon exchange rate of rupee against dollar.

Likewise, CMERT = K2EXRBI*EX09, and that can be used in the equation TBRBI = CMERT - DMERT; and IIT = IIPR + IIPU. SCBCOFC looks like scrambled Scooby-Doo, but stands for scheduled commercial banks' credit, other than food credit.

Resource gap of public sector is given as RGPUBNAS = GCFPUBC - GDSPS; and AINT = (CBDR13 + UTIDR)/2. Ain't rocket science simpler?

Elsewhere the book speaks of why modelling needs to be ongoing; more like concurrent audit, we may add. "Since the economy is most likely to remain in a flux for several years to come, one would never be sure about when to start soiling one's hands. Moreover, a safe bet in matters of quantitative analysis is learning by doing."

Very understandable, unlike passages such as: "The model is fairly dynamic and non-linear with strong linkages across and within different sub-models and sectors... The fact that the effects of exogenous shocks mostly peter out in three years indicates the inherent stability of the structural model. Policy stimulations with the model also highlight the complexity of the Indian economy in the wake of the new reforms and the new economic policy regime."

How mischievous of Peter to engage in stimulations, you may complain, but this is meant for those engaged in "debates on policy scenarios for growth and stability."

Thus, even as economists wax eloquent on their pet models, the common man needs somebody to distil all knowledge and give the analysis, without reasons, in only two words. Such as: "India shining".

Economics@thehindu.co.in

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