Intro: Microsimulation models provide a perfect tool to balance increased expectation of citizens with conflicting policy choices.
For a country like India with its unique vastness and diversity, a reasonably large database needs to be built and regularly updated for developing an efficient and reliable microsimulation model. The data collection needs to be looked from a policy development lens also and not just limited to the policy implementation alone. This mistake is (also) common among some developed countries where acceptance of policy by the masses and the ensuing compliance cost to businesses at times limits data collection to a bare minimum-to the extent of falling short on evaluation of policies. Hence for a truly comprehensive data source we should go for proactive data collection with policy analysis in mind.
Whereas macro estimates using macro models are easy to validate when actual estimates become available in the future, estimates from microsimulation model, by their very nature, require additional efforts to validate. Building such models is thus resource intensive and requires commitment from the administration to dedicate resources not only for their development but also for the maintenance and updating of the model and the underlying data bases. A constant effort is required to collect relevant new data and modify models for them to remain relevant in a changing policy world. In the present era of limited resources and increased expectation of citizens with conflicting policy choices, microsimulation models provide a perfect tool to balance these objectives. Hence, there is value in expending measurable funds on both the data creation and model building and update.
Projecting data into the future also requires rigorous statistical modelling. Availability of ready -made policy relevant data could be a problem. This may entail creation of comprehensive data through statistical merging of disparate data from administrative and survey sources. One thing that needs to be take care of is that, creation of linked data from census and administrative sources may pose privacy challenges. In addition, incorporating behaviour component as we change policy would also require additional analysis using econometric analysis– it is also possible through a dedicated resource base within the ministry.
Once developed, these models would result in increased demand from policy makers as they start getting quick response from a wide spectrum of policy scenarios on the revenue and distributional impacts. Allowing policy makers to decide between conflicting options and their overall impact to choose, at times, the least offensive options, is the crux of the policy development. This is more relevant in the present day economic conditions in a vibrant democracy like India.
Furthermore, such a model would allow the government to develop policies with simultaneous changes in different tax areas (e.g. Personal income tax and the GST), with a combined desirable overall impact on individuals and families while meeting government budgetary constraint on the revenue side and in achieving overarching government objectives.
For building relevant, responsive and responsible analytical capacity, the three key players- policy makers, analysts and modellers need to work in tandem throughout the process of developing policy analysis tools and their applications.
Role of Think Tanks
Once microsimulation models and underlying comprehensive databases are developed, they can be effectively utilised by select think tanks and academics for suggesting policy alternatives. It can also provide the government a different perspective to open up new vistas of possibilities and usher India into a new era of public policy analysis.
However, it is to be noted here that the data shared outside the main government system has to be synthetic even though drawn from actual records for specific and targeted use while ensuring the integrity of the data in terms of its usefulness and the main databank. Privacy concerns add another challenge to data collection more importantly when it has to be made available to policy analysts outside the government. It is a great challenge and should be handled through well-established data disciplines.
The Political Advantage
All said and done, no matter whatever promises and advantages a new idea holds, its acceptance among the policy making political leadership in a democracy depends enormously, rather exclusively, on the answer to this simple question: what political dividend it holds for them? Luckily, with a new set of leadership at the helm in New Delhi that has demonstrated the guts to take India on the road of development through 'minimum governance' and 'maximum transparency', microsimulation model is the most efficient and most handy tool.
Here are some of the 'political' advantages that this tool offers to the policy makers:
- Even at the stage of evaluating pros and cons of a specific tax policy or social welfare decision, the policy makers can play with a wide range of options to predict its impact on the exchequer as well as on the 'winners' and 'losers' among the target groups.
- It even offers sensitivity analysis on marginal changes to policy parameters.
- It offers reliable revenue forecasts in short and medium terms. Thereby helping the policy makers in taking a decision with confidence.
- It helps the top leadership to track accountability and develop and monitor fine grained policies.
- It helps them in effectively allaying misplaced perceptions of taxpayers and critics on perceived inequities in the system.
- Makes it possible to fine tune the policy parameters to such a level to target policies to regions and population subgroups.
- Creates a fair tax system which is built around the principle of ability to pay respecting the special conditions of different segments of the society, and a system where people would pay their fair share of taxes.
- It would help design and implement a refundable tax credit with targeted objectives and population groups essential to the success certain policies such as the GST.
- It ensures consistent estimates for a wide spectrum of policy initiatives. This is critical as policy impacts are bound to straddle over various initiatives and ministries under the new government paradigm. The basic fact being that all policies at the end impact the same population and so governmen’s policy goal should also be to ensure that its overarching policy objectives are always respected.
- The alternate to not building evidence based tool for policy making for a country of India's size and continuing to live with the old hit-and-trial culture of governance could prove expensive in the long run.
In a country where 1.25 billion people have very enthusiastically catapulted PM Narendra Modi to the highest seat of decision making to deliver his promises of a developed and prosperous India, neither of the two sides now have a choice to fail. A time tested digital tool like this can help Modi shape dreams that he has shared with his countrymen.
Dr Anil Gupta (The writer is a Canadian national of Indian origin and an international expert in developing Microsimulation Models for governments)