Economic growth forecasts for the current year (2013-14) by official and non-official agencies have started coming in at regular intervals. On May 3, the Reserve Bank of India (RBI), in its annual credit policy statement, estimated gross domestic product (GDP) growth at 5.7 per cent, which is a full one percentage point below the top end of the union budget’s forecast of between 6.1 per cent and 6.7 per cent. Earlier, the Economic Advisory Council to the Prime Minister (EAC) had pegged it at 6.4 per cent. According to a survey conducted by the RBI on the eve of the credit policy statement, the consensus rate among professional forecasters is 6 per cent. Most of them think that the growth rate will be lower than what they had thought but not by a large extent. The International Monetary Fund (IMF) and the World Bank project growth rates of 5.9 per cent and 6 per cent, respectively. The Asian Development Bank’s (ADB’s) forecast rate is also 6 per cent. By and large, therefore, there is a convergence in the forecasts of non-official professional forecasters and international agencies to around 6 per cent. Among official forecasts, it is a different story. The sharp divergence among the projections of the official forecasters is, however, a matter of concern as it diminishes the value of these forecasts as a whole. Obviously, the validity of these forecasts matter. In a market economy, these occupy an important place in decision-making. And, naturally plenty of public finance assumptions are themselves based on GDP growth rates.
It is in that context that the track record of some of these forecasters assumes significance. Last year (2012-13), many of them were way off the mark, with their initial projections being disconcertingly higher than those published subsequently by the Central Statistics Office (CSO).
The EAC is not the only agency whose initial estimates have completely been at variance with the actual figures, 6.7 per cent estimate ( in August, 2012) versus just 5 per cent, but the extent of deviation is particularly significant. Equally importantly the EAC in its Review of the Economy 2012-13 (April-2013) has a detailed explanation of why it went wrong.
The EAC had also projected a year-end inflation rate of between 6.5 per cent and 7 per cent and a current account deficit (CAD) of 3.6 per cent. While its inflation projection has come true — in fact, WPI (wholesale price index)-based inflation has gone below 6 per cent, its CAD forecast will most certainly prove to be a gross underestimation, unlikely to come down to below 5 per cent even in the most optimistic scenarios.
Thus, under two key parameters, it has been overly optimistic. It gives two reasons. One, it underestimated the strong rebound in the economy in the post-crisis years, 2009-10 and 2010-11, when the GDP grew by 8.8 per cent and 9.3 per cent much higher than the uniform 8.4 per cent official forecast initially. In the event, the investment rate in 2010-11 turned out to be almost 2 per cent higher than the EAC’s estimate. The implication is that policy adjustments to deal with the strong economic performance such as monetary tightening or phasing out tax incentives were delayed by at least one year to the detriment of economic growth subsequently.
Two, the EAC did not take into account the ground reality of too many projects with large investments in key infrastructure areas getting stalled. The fact that these delays were impacting current output significantly was not appreciated.
On the wide divergence in the CAD projection and the latest figures available, the EAC says (1) gold imports did not decline the way it was anticipated and (2) merchant export growth disappointed.
These developments were fairly obvious even to the uninitiated. Maybe, an expert body like the EAC was constrained in not having a forum to update its forecasts. Its reports are published twice a year. The RBI has eight policy statements which it can use to revise its projections.
Explanations apart the EAC and some other institutions, notably the Planning Commission, should disabuse the notion that they are being deliberately optimistic and puff up projections. It is not surprising that the EAC’s estimate of a 6.4 per cent growth this year is subject to more than the usual caveats and qualifications.