The Hindu : Unreliable forecasts

Online edition of India's National Newspaper
Monday, Apr 15, 2002

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Unreliable forecasts

THE EXTREMELY POOR record of economic forecasters in recent years has not deterred the Asian Development Bank from making what many would feel is a highly optimistic projection of a 6 per cent growth of India's gross domestic product in 2002-03, to be followed by a 6.5 to 7 per cent rate of growth in 2003-04. By a coincidence, the Centre for Monitoring the Indian Economy, India's leading independent economic research agency has also just made its own prediction, which at 4.5 per cent, is far lower than what the ADB expects. Since neither the ADB nor the CMIE have been very good at making accurate projections early in the financial year, both estimates must be seen now as entirely conjectural though all the trends indicate that the CMIE is likely to be closer to the mark.

India's economy is currently being held down by a sluggish pace of industrial expansion, which according to the most recent official statistics is at its slowest in nearly a decade. Services may constitute the largest sector of the economy, but their growth is still shaped by industry. And with agriculture having just recorded a substantial bounce after a year of contraction it is highly unlikely that it will be able to repeat its 2001-02 performance in 2002-03. So, how industry performs this year will decide overall GDP growth. The ADB's projections of GDP growth in 2002-03 are based, first, on India benefiting from the ongoing economic recovery in the U.S. and, second, from higher rural incomes boosting consumer demand. Considering that the present sluggishness in Indian industry has been occasioned by a deficiency in domestic demand for investment and final consumption goods, the ADB's optimism is perhaps misplaced. Exports to one market are not by themselves going to take the Indian economy to a higher growth rate. The CMIE, on the other hand, could be guilty of pessimism. This forecast sees agriculture growing by no more than 1.5 per cent this year, even if there is a good, not just normal, monsoon. It will certainly be difficult for this sector to repeat its performance of 2001-02 when, according to the CSO's Advance Estimates, it registered growth of 5.7 per cent. However, a good monsoon should show itself in more than just the marginal growth in 2002-03 that the CMIE expects. While agriculture's performance this year must in the final analysis remain in the realm of the unknown until after the 2002 monsoon, the effect of last year's bounty must result in at least a moderate acceleration in industrial growth and perhaps of services as well. Yet, there is no denying that unless the investment climate improves dramatically it is difficult to visualise a major economic recovery in 2002-03.

It is perhaps for this reason that Yashwant Sinha, Union Finance Minister, and his officials were more circumspect this year in expressing their expectations of GDP growth in 2002-03. The parameters of the Union budget are based on a nominal growth of GDP of about 11 per cent; real GDP growth will depend on the rate of inflation. Unlike last year, when the Finance Ministry was quick to rush to make predictions of both inflation and real GDP growth, only to be subsequently embarrassed when the economy grew much more slowly than expected, the projection this time has been solely of nominal growth. This is as it should be since India's statistical machinery does not facilitate making very accurate projections so early in the financial year. There is the odd signal from a few sectors of an incipient acceleration. But these are too few for making predictions with any degree of confidence. It is better for now to focus on what holds back an economic acceleration than to hazard a guess on a precise number for GDP growth in 2002-03.

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