Noteban: Harvard, Goldman Sachs scholars bemoan lack of "authentic" growth data

By Rajiv Shah
In a sharp observation, scholars of a recent high-profile study, "Cash and the Economy: Evidence from India's Demonetization", whose results have been widely reported, have bemoaned: That there is lack of authentic official data on Gross Domestic Product (GDP) with the Government of India, forcing them to use “nightlights data”, a methodology usually adopted by top international scholars to assess socio-economic growth in highly underdeveloped countries of East Africa and parts of Asia, where no authentic ground level surveys are available to assess development.
Under this methodology, statisticians the world over use satellite images of earth’s nightlights to measure social and economic activity and provide data that can help determine socioeconomic indicators when no other reliable information exists where economic accounting systems are weak, or when satellite images are more frequently available than such data.

Says an Asia Development Bank (ADB) expert, Arturo Martinez, Jr, who has used this method, "The data are more than just satellite images of earth; researchers use these images to derive proxy measures of various official statistics. The presumption is that most social and economic activities at night require light; hence the intensity of nighttime lights and the area they cover should correlate with socioeconomic indicators and economic development."
Using this method as an important measure to assess demonetization (losely referred to as noteban), scholars with well-known institutes – Gabriel Chodorow-Reich (Harvard), Gita Gopinath (Harvard), Prachi Mishra (Goldman Sachs), and Abhinav Narayanan (Reserve Bank of India) – in their study on demonetisation, find that the nightlights-based estimates suggest a “contraction” of output due to demonetization of 2 percentage points “in 2016Q4.”
Insisting that “demonetization had an adverse effect on real economic activity”, the study, published as a National Bureau of Economic Research (NBER) Working Paper No 25370 (December 2018), says, the results show “economically sharp, statistically highly significant contractions in areas (districts) experiencing more severe demonetization shocks”, adding, “The effects on real economic activity peak in the period immediately following the announcement (November 8, 2016) and dissipate over the next few months as new currency arrives.”

The scholars observe “a decline in nightlights-based economic activity and of employment of 3 percentage points or more in November and December of 2016”, which translates into “a decline in the quarterly growth rate of 2 percentage points or more”.
Pointing towards the reason why they adopted the nightlight activity to “measure of real activity following demonetization”, the scholars say, “Nightlight intensity refers to low-light imaging data collected by satellite and filtered to measure the quantity of artificial (i.e. human-generated) light in an area. Such data have been used to augment official measures of output and output growth and to generate estimates for areas or periods where official data are unavailable.”
Noting that nightlights activity suggest that “demonetization reduced real economic activity”, the scholars say, the areas with “larger declines in currency experienced sharper declines in employment and in nightlight activity after demonetization occurred”. They add, “The magnitude of the effect on real activity is substantial.”
Answering the question as to why does the “decline” does not reflect in the “national GDP data”, the scholars say, “National data are volatile and subject to other shocks, making it difficult to discern a single break point around demonetization”, adding, “Our measures of real activity have the advantage over official GDP of directly incorporating informal sector activity.”

This is particularly important, say the scholars, as “the informal sector in India is estimated to account for 81% of total employment (ILO, 2018) and 44% of total output and is especially cash-intensive. While the level of official GDP includes an estimate of informal sector activity derived from a quinquennial household survey, quarterly changes in GDP do not reflect any direct measurement of informal sector activity.”
The scholars note, “Our results also point to the likelihood of an absolute decline in economic activity at the end of 2016 not captured in official statistics”, underlining, “While the cashless limit may appropriately describe economies with well developed financial markets, in modern India cash continues to serve an essential role in facilitating economic activity.”
The scholars conclude, “There may be longer term advantages from demonetization that arise from improvements in tax collections and in a shift to savings in financial instruments and non-cash payment mechanisms. Evaluating these long-term consequences requires waiting for more data and an empirical strategy suited to the study of longer term effects.”

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