A tale of two surveys

Source: By Tulsi Jayakumar: Mint

Two sets of surveys released recently suggest a paradoxical situation that India faces. On one hand, there is the biannual Mood of the Nation Survey (MOTN), conducted by a private group to assess the nation’s mood on several fronts. On the other hand, there is a set of Reserve Bank of India (RBI) surveys involving consumers, households, manufacturers and professional forecasters, and their expectations of the future. While the two sets have not always been in tandem in the past, their divergence appears stark in the current scenario.

The MOTN survey, with respondents drawn from 19 states, including those worst hit by the covid pandemic, suggests that the proportion of people critical of the government’s handling of the situation, relative to that of the earlier United Progressive Alliance (UPA) government, has gone down since January 2020. As many as 72% of its respondents felt that the Narendra Modi government has handled the economy well; the approval rating of the Prime Minister, at 78%, is reported to be at its highest ever.

RBI’s set of five surveys, in contrast, suggests deep despondency. Consumer confidence, at 53.8 in July, was at its lowest point. Households expect inflation to go up by at least 10 basis points both three months and one year ahead. The order books, inventories and capacity utilization of manufacturers suggest fewer orders, lower use of capacity, a stable finished goods inventory to sales ratio, and a higher raw material inventory to sales ratio, all of which point to depressed demand conditions in the future. The business assessment index had fallen sharply from 102.2 in the fourth quarter of 2019-20 to 55.3 in the first quarter of 2020-21. Finally, a panel of 32 professional forecasters has predicted a contraction in all key macroeconomic variables, including real gross domestic product (GDP), consumption spending, investment and total gross value added by the economy’s three major sectors.

Kahneman and Tversky’s seminal work on behavioural economics provides a good starting point for the reconciliation of these apparently contradictory survey results. Another relevant concept here is that of behavioural hyperbolic discounting.

As against traditional economics, which assumes a constant discount rate, people in reality do not value the present the same way they do both the future and the past. For instance, most people would rather have a large piece of cake today, than wait for a year to get a larger weight loss reward. The reason is that they see the future as distant and value the present far more. The principle of hyperbolic discounting suggests that people prefer smaller rewards sooner over larger ones later. They seek immediate gratification. Similarly, people tend to assess the subjective costs of smaller losses incurred in the near future as higher, and those of larger losses to be incurred later as much lower. This gels intuitively with a natural tendency to delay negative consequences.

While much of the work in behavioural discounting is related to the future, there is work which suggests that discounting of the past follows a similar hyperbolic curve, with the distant past appearing smaller than the immediate past. The analogy we can draw is that of a driver who looks at both the rear and front mirrors while driving. Distant objects will appear smaller in both cases.

How do people view an economic situation at a given point of time? Kahneman and Tversky’s work posits that events will be seen as gains or losses based on a reference point. What are the reference points of respondents in those two surveys? It is apparent that they have different reference points. The MOTN respondent seems to look at the present in relation to the past, while the RBI survey respondent looks at the future in relation to the present. Both discount the distant past and future far more. While RBI surveys capture the respondent’s views on “what is happening /likely to happen to me/the economy", the MOTN survey appears more concerned with “who is responsible".

Our representative respondent looks at the state of our economy as particularly bad today compared to the future, expecting the situation to improve later. The respondent’s reference point, with the current crisis, has likely shifted to the preservation of life rather than livelihood (the economic scenario). In this sense, the government’s attempt to save lives through lockdowns is seen as a gain. Its “Jaan hai, jahaan hai" slogan may possibly explain why the MOTN survey’s results vary so much from RBI’s.

Similarly, the UPA government’s handling of economic crises is seen in the distant past. While this should make the current economic slowdown appear larger, given that it still isn’t over, the shift in reference point due to covid may explain why the Modi government got better ratings in August than in January’s MOTN survey.

The other real problem is that of the TINA (There Is No Alternative) factor. If one were to imagine a business with competition, the reference point for its assessment would be the appeal of other businesses. With no viable national alternative in Indian politics today, respondents would compare the incumbent government only with itself, and then assess each situation based on shifting reference points. Rather than approach the two surveys with scepticism, our political parties should ponder their role in contributing to this apparent paradox.