The Story Of India’s Slowing Economy... In Night Lights

The Indian economy has weakened sharply over the past year. We know that from GDP data, from auto sales, from bank credit offtake and a whole host of other indicators tracked month-to-month and quarter-to-quarter.

Many of these indicators tell you the story of the formal economy, at least in initial readings. What about the informal economy?

Over the years, statisticians have continued to look out for additional indicators that are accurate, high frequency, comprehensive and hard to manipulate. Many believe that data on night lights is one such indicator that gives an indication on economy activity. Night lights provide a numerical measure of brightness at night, which acts an indication of human activity. They are visible lights emanating from the earth, captured by satellites from outer space.

The Reserve Bank of India, too, in a paper released in June 2019 said that “night lights are a reasonably robust indicator of economic activity in India as it tracks both trend growth and seasonal variations in GDP reasonably well”. The RBI study found the relationship of night lights with quarterly GDP growth is statistically significant even after controlling for seasonality.

So what does night lights data tell us about the Indian economy, which has seen growth slow sharply from 8 percent to 5 percent over a five-quarter period?

• On an absolute basis, mean night lights stood at 1.87 nanowatt/cm²/steradian — the unit to measure night time light intensity. This was the lowest in two years, shows data from National Oceanic and Atmospheric Administration, a U.S. based scientific agency.
• On a quarter-on-quarter basis, night lights activity contracted by 34.4 percent in Q2 FY20. This was the steepest contraction seen since the quarter ended September 2013. However, cloud cover, particularly during seasonal rains, can distort the data.
• On a year-on-year basis, night light activity contracted by over 3 percent, the data showed.

How reliable is night lights data as one source of judging economic activity along with others?

According to BloombergQuint’s calculations, the correlation of night light data with GDP stood at a robust 0.76. The correlation coefficient indicates the strength of the relationship between both variables.

In addition, the quarter-on-quarter change in night light activity was found to track the trend and seasonal variation in quarter-on-quarter growth of real GDP based on data from 2013 until the first quarter of the ongoing financial year, BloombergQuint’s analysis showed.

Satellite-based night lights data is a relatively good proxy for economic development, said Raj Bhagat Palanichamy, an independent Remote Sensing and GIS analyst. There are some caveats when it comes to usage of night lights data as it is affected by vegetation and cloud cover, which create seasonal fluctuations in the data, he said, adding that the long-term trends are more reliable than quarter-on-quarter changes.

The RBI study, while acknowledging the relationship between night lights and economic growth, had noted that the data can be ‘noisy’ and the relationship between night lights and economic activity is not homogeneous. Along with activity, it may depend on factors such as electricity generation capacity, which emerges as a major determinant of night-light intensity of any region, the paper said.