Switch off the TV tomorrow and don’t waste time on Bihar election results

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A cottage industry has emerged these days around trying to predict which way the Bihar election will go. I don’t want to add to it. And this is not a column explaining who will win the Bihar elections and why. Enough of that has been written and discussed in the media.

The irony in all this is that people sitting in television studios and writing editorials in newspapers, who have never visited Bihar, are perhaps the most confident on which way the election will go. Don’t ask me how.

Nevertheless, there is some logic to it. Dan Gardner explains this in Future Babble—Why Expert Predictions Fail and Why We Believe Them Anyway: “There is a “confidence heuristic”. If someone’s confidence is high, we believe they are probably right: if they are less certain, we feel they are less reliable, this means we deem those who are dead certain the best forecasters.”

As Gardner further writes: “Another problem with the confidence heuristic is that people may look and sound more confident than they really are. Con men do this deliberately. We all do, to some degree. Of course most of us don’t do it brazenly as con men – one hopes – but we all sense intuitively that confidence is convincing. And so, when we are face to face with people we want to convince, we downplay our doubts, or bury them entirely.”

So being confident and forceful about what you say makes for good television and great reading. And that explains why people sitting in studios in Delhi and Mumbai are making the most confident forecasts about who will win in Bihar.

Research also shows that when there is a competition to make forecasts, the forecasts people make get more and more confident. as we go along.

What does this mean during election time? When every political analyst is busy making forecast, if someone wants to standout then he has to make clear and confident forecasts. And that is precisely what has been playing out in television studios up until now.

You are likely to see more of that once election results start coming in and by 10AM tomorrow morning, it will be more or less clear who is likely to form the next government in Bihar—the Nitish Kumar led Grand Alliance—or the Narendra Modi led National Democratic Alliance (NDA).

Once the results are out political analysts will offer us explanations on why the results happened to turn out the way they have. If Narendra Modi led NDA wins, then we will hear stuff like the Modi magic is still at work, people have taken Modi’s promise of a separate Rs 1.25 lakh crore development package for Bihar seriously and so on. Some cheeky analyst might also suggest that all the statements made by the “so-called” fringe elements in the ruling Bhartiya Janata Party (BJP), also helped bring in the votes.

If the Nitish Kumar led Grand Alliance wins, you will hear analysts stay stuff like there was no anti-incumbency at work. The development carried out by Nitish Kumar has worked. The women have come out in full force to vote for him given all the development projects targeted towards women Kumar carried out. And voters in state elections have once again shown that development gets you votes.

Given that it is Bihar election results that the analysts will be analysing, there is bound to be some analysis along caste lines. You are likely to hear stuff like the Muslims plus Yadavs, the base on which Lalu Prasad Yadav ruled Bihar for a long time, voted for the Grand Alliance en masse. Hence, all the statements made by the so-called fringe elements in BJP did not work.

So if the BJP wins we will be told that the statements by fringe elements may have added the icing on the cake. If it loses, we will be told it didn’t work.
Long-story short, we will be told a lot of stories explaining why things happened the way they did. As Gardner writes: “People love stories, both the listening and the telling. It’s a central part of human existence, found in every culture, in every place, in every time…For explanation-sharing to work, however, a story cannot conclude with “I don’t know” or “The answer isn’t clear.”” The narrative should be complete. Incomplete stories do not work.

Hence, there will be no shortage of explanations and stories on why things happened the way they did in Bihar. Political analysts will come up with extremely coherent reasons on why things happened the way they did. You won’t hear phrases like “I don’t know” or words like “maybe” or “possibly”. In fact, some analysts will even say stuff like “as I have been saying all along”. In case of television channels the “I” will become “we”.

Even those who get their forecast wrong (and believe me there will a lot of them) will revise their forecasts. As Jason Zweig writes in The Devil’s Financial Dictionary: “Once you learn what did happen, your mind tricks you into believing that you always knew it would happen. Contrary to the popular cliché, hindsight is not 20/20; it is barely better than legally blind.”

This tendency is referred to as hindsight bias.

Hindsight bias is also referred to as “I knew it all along effect”. As Nassim Nicholas Taleb writes in Fooled by Randomness: “Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny…Psychologists call this overestimation of what one knew at the time of the event due to subsequent information…the “I knew it all along” effect.

The Nobel Prize winning psychologist Daniel Kahneman talks about this phenomenon in his book Thinking, Fast and Slow, in the context of the financial crisis which broke out in late 2008.

As he writes: “I have heard of too many people who “knew well before it happened that the 2008 financial crisis was inevitable.” This sentence contains a highly objectionable word, which should be removed from our vocabulary in discussions of major events. This word is, of course, knew. Some people thought well in advance that there would be a crisis, but they did not know it. They now say they knew it because the crisis did in fact happen.”

Something similar will play after the Bihar election results as well. Depending on the result, people will adjust their analysis and say “I knew this will happen”.

So if Nitish wins they will say, I knew this will happen, even if they had been predicting a Modi win earlier. And vice versa.

This is not a good thing. As Kahneman writes: “What is perverse about the use of know in this context is not that some individuals get credit for prescience that they do not deserve. It is that the language implies that the world is more knowable than it is. It helps perpetuate a pernicious illusion. The core of the illusion is that we believe we understand the past, which implies that the future also should be knowable, but in fact we understand the past less than we believe we do.”

Given this, it’s best not to waste time watching all the analysis that will pour in on Bihar elections, all through the day tomorrow and on Monday.

Switch off the television.

Take your kids out for a spin.

Buy some gold for your Mother. And your wife. Or your girl-friend (It’s Dhanteras after all).

Or just pick up a good book and read.

Happy Diwali!
The column originally appeared on The 5 minute Wrap Up on Equitymaster on Nov 7, 2015

How UPA turned NDA’s economic growth into shambles

upaVivek Kaul 

In both love and war, it makes sense to hit where it hurts the most.
The war for the next Lok Sabha elections is currently on. And there is no love lost between the two main parties, the Congress and the Bhartiya Janata Party (BJP).
The BJP today hit out at the economic performance of the Congress led United Progressive Alliance government, over the last ten years.
Politically, this makes immense sense given the bad state the economy is in currently. Economic growth as measured by the growth in gross domestic product (GDP) is down to less than 5%. The GDP grew by 4.7% between October and December 2013.
The rate of inflation as measured by the consumer price index had been greater than 10% for a while and has only recently come below 10%. The consumer price inflation for February 2014 came in at 8.1%.
Industrial activity as measured by the index of industrial production (IIP) was flat in January 2014, after falling for a while. The overall index grew by just 0.1% during January 2014. Manufacturing which forms a little over 75% of the index fell by 0.7% during January 2014, in comparison to January 2013. This primarily is on account of the slowdown in consumer demand.
People have been going slow on spending money because of high inflation. This has led to a scenario where they have had to spend more money on meeting daily expenditure. Retail inflation in general and food inflation in particular has been greater than 10% over the last few years, and has only recently started to come down. Given this, people have been postponing all other expenditure and that has had an impact on economic growth. Anyone, with a basic understanding of economics knows that one man’s spending is another man’s income, at the end of the day. When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. When we look at the IIP from the use based point of view it tells us that consumer durables (fridges, ACs, televisions,computers, cars etc) are down by 8.3% in comparison to January 2013. The overall consumer goods sector is down by 0.6%.
This slowdown in consumer demand was also reflected in the gross domestic product(GDP) numbers from the expenditure point of view. Between October and December 2013, the personal final consumption expenditure(PFCE) rose by just 2.6% to Rs 9,81,463 crore in comparison to September to December 2012. In comparison, during the period October to December 2012, the PFCE had grown by 5.1%.
The lack of demand along with a host of other reasons also means that the investment climate for businesses is not really great. This is reflected in the lack of capital goods growth, which was down by 4.2% during January 2014. If one goes beyond this theoretical constructs and looks at real numbers like car sales, they also tell us that the Indian economy is not in a good shape as of now. Smriti Irani,
a television actress turned BJP politician summarized the situation very well, when she said “Today, as the Congress-led UPA leaves office, it leaves behind a legacy of an economy which has been mismanaged.” Yashwant Sinha, former finance minister and senior BJP leader, went a step ahead and said that “an investment crisis” and “a crisis of confidence in the economy”. The Congress party is likely to react to this attack by the BJP by following the conventional line that it has always followed. The party is most likely to say that India has done much better under the UPA than the BJP led National Democratic Alliance (NDA).
Prima facie, there is nothing wrong with the argument. Between 1998-99 and 2003-04, when NDA was in power, the average GDP growth rate was at 6% per year. Between 2004-05 and 2012-2013, when the UPA has been in power the average rate of growth has been at 7.9% per year. If one takes into account, the GDP growth rate for this financial year i.e. 2013-2014, this rate of growth will be lower than 7.9%,
but still higher than the 6% per year achieved during NDA rule.
But it is worth remembering here that the economy is not like a James Bond movie, where the storyline of one movie has very little connection with the storyline of the next. An economy is continuous in that sense.
The rate of economic growth in 2003, a few months before the UPA came to power, was at 7.9%. The rate of inflation was at 3.8%. In fact, the rate of inflation during the entire NDA term averaged at 4.8%, whereas during the first nine years of UPA regime between 2004-2005 and 2012-2013, it has averaged at 6.7%.
If we take the rate of inflation during this financial year into account the number is bound to be higher. The index of industrial product, a measure of the industrial activity in the country,
was growing at 8% in early 2004. Currently it is more or less flat.
The fiscal deficit for the year 2003-2004
came in at 4.5% of the GDP. The fiscal deficit for the year 2012-2013 was at 4.9% of the GDP. The fiscal deficit for the year 2013-2014 has been projected to be at 4.6% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends.
As I have explained in the past, this number has been achieved through accounting shenanigans and does not reflect the real state of government accounts. The expenditure and thus the fiscal deficit of the government
is understated to the extent of Rs 2,00,000 crore. This is not to say that there wouldn’t have been any accounting shenanigans under the NDA rule, but they would have been nowhere near the present level.
The broader point here is that the NDA had left the economy in a reasonable good shape on which the UPA could build. And the first few years of growth under the UPA rule came because of this. In simple English, unlike James Bond movies, growth under the UPA cannot be separated totally from the growth under the NDA. The growth under UPA fed on the earlier growth under the NDA.
That’s one point. The second point that needs to be brought out here is that the massive economic growth during 2009 and 2010,
when India grew by 8.5% and 10.5% respectively, was primarily on account of the government expanding its expenditure rapidly.
The government expenditure during 2007-2008 had stood at Rs 7,12,671 crore. This has since rapidly grown by 123% and stood at Rs 15,90,434 crore for 2013-2014. While this rapid rise in government expenditure ensured that India grew at a very rapid rate when the world at large wasn’t, it has since led to substantial economic problems. During the period Atal Bihari Vajpayee was the Prime Minister of India, the government expenditure grew by 68% and stood at Rs 4,71,368 crore during 2003-2004.
This rapid rise in government expenditure in the last few years has led to loads of problems like high interest rates and inflation, as an increase in government spending has led to an increase in demand without matched by an increase in production.

As Ruchir Sharma put it in a December 2013 piece in the Financial Times
“With consumer prices rising at an average annual pace of 10 per cent during the past five years, India has never had inflation so high for so long nor at such an unlikely time…Historically, its inflation was lower than the emerging-market average, but it is now double the average. For decades India’s ranking among emerging markets by inflation rate had hovered in the mid-60s, but lately it has plunged to 142nd out of 153.”
In fact, if one looks at the incremental capital output ratio, it throws up a scary picture.
Swanand Kelkar and Amay Hattangadi in a December 2013 article in the Mint wrote “the Incremental Capital Output Ratio (ICOR)…measures the incremental amount of capital required to generate output or GDP. From FY2004 till FY2011, India’s ICOR hovered around the 4 mark, i.e. it required four units of investment to generate one unit of output. Over the last two years, this number has increased with the latest reading at 6.6 for FY2013.” Currently, the number stands at 7.
This, in turn, has led to a massive fall in investment. As Chetan Ahya and Upasna Chachra or Morgan Stanley write in a recent research report titled
Five Key Reforms to Fix India’s Growth Problem and dated March 24, 2014, “Public and private investment fell from the peak of 26.2% of GDP in F2008 to 17.3% in F2013. Indeed, private investment CAGR[compounded annual growth rate] was just 1.4% between F2008 to F2013 vs. 43% in the preceding five years.”
What all this clearly tells us is that the economic growth during the UPA rule fed on the economic growth during the NDA rule. The UPA has left the economy in shambles, and the government that takes over, will have a tough time turning it around.
The article appeared originally on www.firstpost.com on March 30, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)