Forecasting with undue caution

By S. Swaminathan

With not more than ten weeks remaining in the fiscal year, 1999- 2000, forecasting the GDP growth rate for the whole year may not be a too hazardous venture. The Central Statistical Organisation (CSO) released its estimate of GDP growth during the second quarter (July-September) of the current fiscal year on December 31, according to which the growth rate was 6 per cent for Q2, which was slightly better than the performance in the first quarter (April-June), namely 5.9 per cent.

Extrapolating the growth rates for the whole year from the estimates for Q1 and Q2, a GDP growth rate of 5.5 to 6 per cent appears quite reasonable, barring severe adverse developments. The Reserve Bank of India in its recent report on Currency and Finance (1998-99) has estimated the probable GDP growth rate for 1999-2000 at 6 per cent. And so did the Prime Minister, Mr. Atal Behari Vajpayee, tell the Economic Advisory Council last week.

CMIE forecast

The Centre for Monitoring Indian Economy (CMIE) has now come out with an estimate according to which GDP growth this year will be 5 per cent as compared to 5.8 per cent growth actually recorded during 1998-99. Till December 1999, the CMIE had forecast a growth rate of 5.1 per cent. Which means that the CMIE now looks at the scenario with a little less optimism than in the past few months.

In its estimates of GDP growth rate for the second quarter this year, the CSO had projected a positive 1.8 per cent growth for the agricultural sector.

In its revised forecast, the CMIE holds that agriculture will record a 1.2 per cent decline during 1999-2000 as against a decline of one per cent forecast earlier. From the CMIE viewpoint, an overall GDP growth rate of 5 per cent (rather than 5.1 per cent) would involve an agricultural growth rate of minus 1.2 per cent, an industry growth rate of 6 per cent and a services sector growth of 8 per cent. Even granting that the agricultural sector might suffer a decline in output overall during the year, the CMIE forecast for GDP growth rate at 5 per cent could represent a cautious underestimation.

The grounds for such an opinion are: (1) The industrial sector is likely to register a higher growth than 6 per cent projected by the CMIE. In the second quarter this year, manufacturing itself recorded a 7 per cent growth while electricity, gas and water supply posted a 10 per cent growth. What is even more significant, the construction sector put up an impressive growth of 8 per cent which is likely to accelerate further during the rest of the year. All in all, the growth in the industrial sector may well be pushed up to around 9-10 per cent. And this despite the blip in industrial output during November 1999.

(2) In the services sector, excepting the sub-sector ``community, social and personal services'', the average growth rate for the year seems likely to surpass the 8 per cent projected by the CMIE. All of which point to the probability of the GDP growth rate for 1999-2000 hovering around 6 per cent rather than 5 per cent indicated by the CMIE.

Analysts scrutinising CMIE forecasts over the years would be inclined to associate extreme caution with the CMIE GDP forecasts rather than a high degree of approximation to the eventual growth performance in the economy. Although the CMIE first forecast for GDP growth during 1997-98 was 5.3 per cent (which proved to be optimistic in the light of what turned out to be a growth rate of 5 per cent), its later forecast of a 4.5 per cent growth rate showed its clear preference for an underestimate.

For 1998-99, again, the CMIE forecast was a GDP growth rate of 4.5 per cent while the actual turned out much better at 5.8 per cent. It could well be argued that an underestimate of GDP growth (by way of forecast) has its own value in energising policymakers towards expeditious decisions that are conducive to improved performance of different sectors of the economy. But then the issue is not about the psychology which a statistical forecast generates but rather its plausibility and methodological credibility.

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