What’s behind welter of GDP forecasts?

A case of educated guesswork or mere intuitive beliefs?

The current fiscal year is only veering towards the end of its first quarter but we are already confronted with a spate of estimates about the likely order of economic growth.

To sift through them all without feeling a sense of bewilderment is impossible.

For,  these projections widely vary and, in view of the magnitudes involved, the difference is not between tweedledom and tweedledee but significant.

Consider the GDP forecasts issued by the various agencies. We have a very conservative assessment by the World Bank —- 7% —-  and, on the other, there is a highly optimistic scenario painted by the Centre for Monitoring Indian Economy — 9.5%.
Between these two extremes, there are other predictions, notably by the Economic Advisory Council to the Prime Minister at 8%; by the Union finance minister at 8.5% and the Reserve Bank of India, in its annual credit and monetary policy statement at between 8% and 8.5%.

The Economist of London envisages a deceleration in real GDP increase to 7.6% from the preceding year’s 9%, but the economic think tank, National Council of Applied Economic Research, feels that the Indian economy would virtually sustain the growth momentum by registering a pace of 8.5% - 8.9%.

What these figures foretell about the economic prospects for 2008-09 are conflicting. Some anticipate a serious loss of
momentum in GDP spurt during the current fiscal; there are
quite a few who believe that the 8%-9% spurt is within reach and there is a minority who entertain a more sanguine assessment of the economy.

To be fair, all these widely disparate estimates have the backing of elaborate reasoning, which is rooted not in solid data but involves a large dose of subjectivity.

Questions are germane about this exercise. As pointed out earlier, the fiscal year has only two months behind it and even for these months, firm data are hard to come by.

So, at this stage, it is premature even to hazard a guess about the overall macro-economic performance.

Specifically, there is a question mark on the behaviour of the south west monsoon. Even though the India Meteorological Department has predicted a normal year, this forecast has often proved wrong; worse still, it does not say anything about the spatial and temporal distribution of precipitation between June and September 2008.

So, we have no reliable means of determining how the kharif season —- the major contributor to the agricultural production in any year —- will shape up.

Though the share of the farm sector is around 21% and falling,  it can still drag or lift the GDP growth rate by sizeable percentage points, depending upon the progress of the monsoon.

In regard to the secondary sector too, it is just not possible to say anything definitive about what is in store during the current fiscal.

True, industry has done well in recent years but we need an acceleration to 9% and more to propel the economy to a higher orbit.

In the case of mining and electricity too, the trend in the recent past has been erratic. Perhaps, we are on firm ground about forecasting the GDP surge emanating from the services sector —- an area of the economy where the incremental rate has been high and sustained and the secular trend may give a clue to what may be in the offing in 2008-09.

Seen in this light, next to nothing can be gleaned at this point about the primary and secondary sectors —- that is, a substantial chunk of the economy —- during the current fiscal.

Therefore, the so-called estimates are only an educated guesswork.

These exercises are not underpinned by empirical data. Interpret them cautiously as they are not ex cathedra pronouncements.
To be more blunt, take them with a generous pinch of salt.