The news on the economy front has been sanguine for April. Yet, there is a lot of pessimism in the system and almost all economy watchers are lowering their growth forecasts ostensibly due to the war and its collateral effects on India. Is there something wrong somewhere?

The PMI numbers for manufacturing and services in April are higher than those for March, which means that business is up on the two critical sides. The IMD has forecast a normal monsoon, which signals that barring a few aberrations the kharif crop should be good. The GST collections for April have been at an all-time high which, according to some official indications, will probably be replicated in May as well. Exports continue to grow at close to 25 per cent in April.

All this means that in probably the most critical month after the war began in February, the Indian economy has done rather well. Yet, almost all economists had scaled down growth forecasts even before the RBI increased the repo rate on May 4.

The problem with forecasts is that they tend to become adaptive to the situation and any significant news can cause a revision. And once it is done officially by, say, the RBI, all other forecasters lower their estimates too and rarely does anyone go against the tide. At most, forecasts are retained. This is a practice not just in India but everywhere around the world. If this herd mentality is a trend, then do these forecasts make any sense?

The government of India needs to forecast GDP because the edifice of the Budget is built on this number — all tax collection projections have to be based on how the economy behaves. This done, the government rarely changes the forecast which is noteworthy. As the Budget is a one-time exercise, there is no need to fine tune this number. The revenue numbers remain sacrosanct and while expenditure can be increased through supplementary demands, there is no commentary on growth.

The RBI, however, has a tougher job. It has to take a call on both inflation and GDP growth when formulating policy. Therefore, the central bank perforce has to commit to numbers every two months as its stance and policy decisions hinge on these forecasts. This was not the case when there were only two policies — for the slack and busy seasons.

In a way, these numbers justify the action taken or not taken by the RBI or any central bank for that matter. Therefore, as the number of policies increase, so does the number of forecasts which are amenable to change frequently. In fact, there are forecasts given for every quarter or for half-years which stretch at times to the next year as monetary policy is supposed to be forward looking.

Therefore, official forecasts are necessary because they form the basis of fiscal and monetary policies. But then why should every organisation that houses economists or market analysts also do the same thing? While it is the job of economists to provide continuous prognosis on every aspect of the economy, the justification is that they need to provide such information to customers or investors. Often, everyone is talking to their global parents and have to per force inundate mailboxes with such forecasts.

But for sure the RBI change is the tipping point. While some calibrate their forecasts to an external shock like, say, war or Covid, any change in the RBI stance causes a revisit to the earlier ones even when none of the underlying conditions have changed significantly.

Tend to confuse

The problem with forecasts, especially when it comes from non-government arms, is that they tend to confuse. For example, before the pandemic began, the IMF had projected global growth to be 3.3 per cent in January 2020 even while China faced the first lockdown. In April, the forecast moved down 200 per cent to -3 per cent. Two months later, the forecast was replete with pessimism and went down to -4.9 per cent. Post October, the number went to -4.4 per cent and finally the fourth subsequent forecast was -3.1 per cent.

The movement of these forecasts was literally bell-shaped. This just shows how fickle forecasts are when conditions are uncertain. Quite clearly, they move at an accelerated pace along with the level of panic.

Over the years, the World Bank and the IMF have become standard references for forecasts as these are done across the board, which makes comparison possible. But being prone to large swings, these estimates have to be interpreted carefully and can be used as reference rather than for evaluation. Countries face challenges when it comes to making forecasts, which are pivots used by these multilateral agencies.

For example, the NSO brings out the first advance estimates for GDP growth in January while the provisional estimates come in May. Ideally, the advance estimates should be done away with as they add to the plethora of confusion. In January, the NSO has only the first-half estimates for GDP while there would be some information on metrics like industrial growth for October. Extrapolations are made to yield the final number.

For FY17, for instance, the initial estimate was 7.1 per cent, which finally turned out to be 8.3 per cent. In FY19, the advance estimate of 7.2 per cent got watered down to 6.5 per cent, while in FY20, which was the pre-pandemic year, the initial estimate of 5 per cent got diluted to 3.7 per cent. In one year, the NSO was very pessimistic while in the other two it had to lower its optimism.

Wide variations

Now, forecasts for GDP growth vary a lot across different forecasters and the FY22 second advance estimate of 8.9 per cent was sandwiched between 7 per cent at the lower end and 13 per cent at the higher end at various points of time. As every percentage growth number involves something like ₹1.35-lakh crore, the amounts being spoken of are quite large.

Forecasts vary depending on the assumptions made by the economist and lead to such variations. Just like how it is said that predicting the stock market is equivalent to monkeys throwing darts with their eyes covered, the art of forecasting is more serious for sure, but closely resembles this.

As forecasts move to other metrics like inflation, they become even more fine-tuned to pivots which are provided by the RBI. Almost quite certainly when the RBI has its round of revised forecasts in June, one may expect all other estimates to change!

The writer is Chief Economist, Bank of Baroda. Views are personal

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