Primitive explanations of primitive assumptions

by Mahesh Vyas

Prof. Pulak Ghosh and Dr. Soumya Kanti Ghosh provided explanations to what I called as primitive assumptions in their work on payrolls data. I had pointed out to them, four areas where their assumptions were primitive. These were (1) assumption of a 50 per cent "haircut", (2) assumption of a 25 per cent "drop out" rate, (3) selection of the age band 18-25 years in the case of EPFO and (4) selection of a different band viz. 18-22 years in the case of ESIC.

Nevertheless, I welcomed the use of a payrolls database and even exhorted the government to use the work of the authors. The assumptions are not OK even if tweaking them don’t alter their results. Here’s why...

A "haircut" of 50 per cent used by the authors possibly means that they have assumed that there is a 50 per cent overlap between the different databases used by them. I call this a primitive assumption unless the authors have an explanation. The authors’ response is that you may use any other level of haircut and it will not make any difference to the outcome. Left without an explanation but now with a newly-acquired lack of relevance of the level of the haircut, the assumption continues to remain primitive and now also of little use - with respect to the desired outcome, I suppose.

The second question is whether the term "drop out" rate of 25 per cent meant a labour participation rate of 75 per cent for the age group 18-25 years? If yes, then is this not too high? Their answer is that this is based on discussions. But, the age-wise LPR is known to be very low in the age group 18-25, and even the best LPR in India is around 60 per cent for the middle aged. If their study chooses to pick 75 per cent from discussions rather than empirical work then it is worse than primitive because it chooses to not use established wisdom of the inverted U curve of the LPR.

My third question is about their cherry-picking of EPFO accounts of only those people who are between 18 and 25 years of age. There is no explanation of this choice. This is the age group that sees the maximum new job-seekers and also the maximum job turnover. But, it is primitive to assume that these are new jobs. Youngsters don’t get only "new" jobs. They get replacement jobs as well - replacements for retirements and for jobs turnover.

Indrajit Gupta, in an article in Business Standard on January 25, mentioned that according to a survey 70 per cent of students quit their first job after graduating within a year. The probability of a student quitting a first job within two years is obviously even higher. Thus, even if students take their first job anytime between 18 and 23 years of age, the probability of almost all of them taking two jobs by the time they are 25 is very high. Therefore, the possibility of double counting of jobs within the age group chosen by the authors is almost a certainty. In fact, people can move more than two jobs before they reach 26 years of age.

Ghosh and Ghosh have revealed that there is a cluster around 22 years of age. They claim that 22 years is best age for the first job. But, it is unlikely that this cluster would be bigger than all the first jobs till age 21. And, if the 22 year-olds change jobs by age 25 or more as the authors explain then why will the 18 to 21 year olds remain in their first jobs without any change till 25? Evidently, a cluster around 22 years does not explain anything. The explanations are as primitive as the assumptions were in the first place.

The authors are silent on the difference in the chosen age groups for the EPFO database (18-25) and ESIC (18-22).

It appears that the authors have not done any de-duplication of overlapping records or adjustments for bulk additions from small firms. Instead, they made some assumptions which they believe will automatically overcome problems of duplication. This is a very primitive approach.

Finally, their stance that privileged access to data does not matter is untenable. Replication is the essence of all research today. Results that cannot be scrutinised and replicated by independent referees (independent of the authors and sponsors) do not carry any credibility. And to clarify, all CMIE databases, even at the record-level, are available for a subscription and we institutionally support replication in research.

First Published in Business Standard Link

Unemployment Rate
Per cent
5.4 -0.0
Consumer Sentiments Index
Base September-December 2015
95.6 0.0
Consumer Expectations Index
Base September-December 2015
95.7 -0.3
Current Economic Conditions Index
Base September-December 2015
95.5 +0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 17 Dec 17 Mar 18 Jun 18
New projects 1.25 1.49 3.60 2.27
Completed projects 1.25 1.15 1.42 0.82
Stalled projects 0.69 0.88 3.41 0.30
Revived projects 0.34 0.22 0.26 0.22
Implementation stalled projects 0.78 0.71 1.92 0.03
Updated on: 17 Jul 2018 8:20PM
Quarterly Financials of Listed Companies
(% change) Sep 17 Dec 17 Mar 18 Jun 18
All listed Companies
 Income 7.9 12.0 10.2 18.1
 Expenses 9.0 13.0 17.0 21.4
 Net profit -18.0 -14.3 -81.9 8.4
 PAT margin (%) 5.5 4.8 1.2 17.4
 Count of Cos. 4,501 4,491 4,283 45
Non-financial Companies
 Income 8.2 13.3 11.8 18.5
 Expenses 8.1 12.3 12.7 22.7
 Net profit -6.1 13.2 -2.5 6.7
 PAT margin (%) 6.2 6.4 6.5 18.1
 Net fixed assets 9.2 11.9
 Current assets 2.9 8.0
 Current liabilities 11.0 10.3
 Borrowings 3.4 1.8
 Reserves & surplus 7.9 7.8
 Count of Cos. 3,460 3,463 3,315 32
Numbers are net of P&E
Updated on: 17 Jul 2018 8:21PM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 5.8 12.3
 Expenses 5.7 1.9 5.8 17.9
 Net profit 0.1 -9.3 26.2 -51.0
 PAT margin (%) 3.0 2.8 3.5 3.6
 Assets 9.5 10.2 7.3 14.1
 Net worth 8.5 11.3 7.0 11.0
 RONW (%) 5.8 4.9 5.9 4.8
 Count of Cos. 26,056 24,316 21,815 218
Non-financial Companies
 Income 4.8 1.0 5.7 9.8
 Expenses 5.0 0.3 5.9 9.3
 Net profit -8.5 20.4 21.4 11.9
 PAT margin (%) 2.0 2.5 3.0 13.4
 Net fixed assets 13.3 17.4 6.5 21.2
 Net worth 7.0 12.0 5.7 5.3
 RONW (%) 4.6 5.2 6.1 17.7
 Debt / Equity (times) 1.1 1.1 1.0 0.2
 Interest cover (times) 1.9 1.9 2.1 16.0
 Net working capital cycle (days) 66 65 62 -12
 Count of Cos. 21,269 20,387 18,246 150
Numbers are net of P&E
Updated on: 04 Jul 2018 4:50PM