Game of estimation: Here's why India's GDP, inflation forecasts can be tricky

“We actually can’t forecast all that well, and yet we pretend that we can, but we really can’t.” Famous words by Alan Greenspan, the long-serving former chairman of the US Federal Reserve, who left office in 2006 just before the global financial crisis. Having dealt with the high and lows of forecasts all his life, Greenspan would know.

And so it happened that exactly a year ago, when the economy was still under the cloud of the pandemic, Finance Minister Nirmala Sitharaman (in picture) presented the Economic Survey with an optimistic real GDP growth projection of 8-8.5 per cent for 2022-23. Reserve Bank of India (RBI) Governor Shaktikanta Das followed up 10 days later with a forecast of 7.8 per cent. The retail inflation rate, or the consumer price index (CPI), was estimated at 4.5 per cent for the same period.

These estimates were thrown out of the window by the sudden conflict between Russia and Ukraine, the global tightening of monetary policy, and fall in India’s exports. The real GDP will likely close the year at 6.5 per cent, down 150-200 basis points from the forecasts. CPI, estimated by RBI at 6.5 per cent for FY23, too, is up by 200 basis points from the forecasted level of 4.5 per cent. Should one now believe RBI’s 2023-24 forecasts of real GDP at 6.4 per cent and retail inflation at 5.3 per cent?

The answer probably lies in what Greenspan said about economic forecasts. There is always a risk of things turning topsy-turvy because of Black Swan events. Madan Sabnavis, Chief Economist of Bank of Baroda, whose research team’s estimates match the government and RBI figures, believes that a disastrous monsoon, a drop in corporate profitability, a reduction in bank credit growth, or oil prices beyond $90 per barrel might affect the current projections. “The forecasts are ultimately based on some assumptions,” says Sabnavis.

Experts are already surprised by the optimistic GDP numbers. Pranjul Bhandari, Chief Economist for India and Indonesia at HSBC, is a bit puzzled by the 6.4 per cent GDP forecast, as her own bank’s estimate in her research note is far lower at 5.5 per cent. Research teams of private sector HDFC Bank, rating agency CRISIL and Axis Mutual Fund, among others, have predicted lower growth next year.

So, what could derail the GDP and inflation forecasts in 2023-24?

India is primarily a consumer-driven economy, with consumption accounting for more than half of GDP. In certain corporate circles, the Budget is being hailed as boosting consumption and demand. A case in point is the lower tax structure for those who choose the new tax regime, which has no exemptions. The government has proposed a reduced tax surcharge rate on income above Rs 5 crore to 25 per cent, bringing down the maximum tax rate from 43 per cent to 39 per cent. “It is unlikely that the lower tax rate would boost consumption. This new regime is already a non-starter,” says a private banker. In a Budget size of Rs 45 lakh crore, the total income tax collection—with the bulk under the old tax regime—is only Rs 9 lakh crore. There are also expectations of slowing pent-up consumption demand—higher interest rates and higher inflation will dampen shoppers’ spirits. The full impact of the 250-basis point hike in the repo rate will be felt next year.

In addition, the government’s own consumption expenditure, or revenue expenditure, which is 80 per cent of the total expenditure, is expected to grow by a paltry 1.27 per cent in 2023-24. In fact, there is a cut in subsidies, and schemes like MGNREGA have lower allocations under the revenue expenditure. There is a preference for capital expenditure, which will grow by 38 per cent to Rs 10 lakh crore in the next fiscal. Only time would tell whether sustained government capital expenditure will rekindle India Inc.’s animal spirits.

India’s exports are also weakening due to the global slowdown, and imports continue to rise on the back of government capex. This will put pressure on the current account deficit and also the rupee against the US dollar, which has already depreciated over 10 per cent last year. There is a threat of imported inflation, although the market is projecting lower inflation than RBI’s forecast. And, if the final print of GDP is lower, there would be a negative impact on the fiscal deficit as well as tax collection.

The 96-year-old Greenspan, who doesn’t shy away from making future projections even today, now anticipates a US recession. Some would say this is not good news for India. Take it with a pinch of salt if you are not betting against India.

@anandadhikari