Did we become too gloomy?
The Financial Express, February 11, 2009, Page 6
Mahesh Vyas
According to the Central Statistical Organisation’s advance estimates, India’s GDP would grow by 7.1% in 2008-09. This is higher than expectations. Most agencies had predicted a severe slowdown in growth this year, compared to the average growth of 9% recorded in the preceding three years. The median forecast of real GDP growth in 2008-09 according to the RBI’s Survey of Professional Forecasters was 6.8%. The lowest forecast of 6.3% is by the World Bank. More generally, there have been low expectations reflecting a sense of pessimism amongst commentators in the media and in business. CSO’s 7.1% growth estimate is reassuring compared to these gloomy prognostications.
An interesting statistical observation of the CSO’s advance estimates (AE) is that at least since 2001-02, in all but one year, these have been lower than the quick estimates (QE). Quick estimates are generated about ten months after the year is over and in many ways give the first estimate of growth based on reasonably sufficient data. And, they almost always show a higher estimate of GDP growth than the AE. The QE for 2007-08, released by the CSO a few days earlier was 9%, which was higher than the AE estimated earlier at 8.7%. If this recent past is any indication, then it is likely that the QE for 2008-09 would turn out to be higher than the 7.1% estimated in the CSO’s AE.
The AE has underestimated growth in 2008-09 because it was compelled to use an outdated index of industrial production. The IIP is based on a basket of products and weights that reflect the country’s industrial setting in 1993-94. We have changed dramatically since then. But, the IIP does not reflect this. As a result, it systematically underestimates growth. The degree of this underestimation keeps increasing as the years go by. The quarterly financial results of listed companies provide evidence that this underestimation is not small.
There are efforts underway to upgrade the IIP to a base year that is more recent. When these get reflected into a new series of the IIP, the GDP estimates for 2008-09 and the earlier years would look much better than they seem now.
2008-09 has been a challenging year to forecast. Growth forecasts have been revised downwards systematically during the year. The median forecast of the Professional Forecasters published by the RBI was 8.1% in April 2008. This declined to 7.9% in July and then to 7.7% in October 2008 before it came down to 6.8% in January 2009. The Economic Advisory Council of the Prime Minister had predicted a growth of 8.5% in January 2008. This was revised down to 7.7% in July 2008 and then to 7.1% in January 2009. Most forecasters feared high interest rates, high inflation and the RBI’s policy to suck out liquidity from the system. Additional fears were the extraordinary rise in crude oil prices and the slowing global economy.
The Indian economy survived high interest rates, high inflation and high crude oil prices well. It also survived RBI’s enthusiasm to rein in a misunderstood indicator for inflation—the wholesale price index, when they should have been targeting the consumer price index. Real GDP grew by a handsome 7.8% in the first half of the year. Growth could have been higher if RBI had been less enthusiastic. And, growth could have continued at a robust pace but for the extraordinary global liquidity crisis of September-October 2008.
We will have a measure of the damage that the global liquidity crisis inflicted on India when the CSO releases estimates of GDP growth in the October-December 2008 quarter. I expect it to be closer to 4.5%. But the economy will recover from this trough in the next quarter. Early indications are promising.
The area sown under rabi crops is up 4.1%. Maruti Suzuki and Tata Motors have reported a higher growth in sales in January 2009 compared to a year ago. So has TVS and Hero Honda in respect of two wheelers. Cement consumption continues to grow at a healthy pace. Production data had started to improve in December itself. Infrastructure sectors such as railways and ports that had recorded a steep fall in October and November recovered in December. Growth in consumption of petroleum products accelerated to 4.6% in December compared to 2.9% in November and 0.9% in October.
The CSO’s 7.1% growth for 2008-09 as a whole and its 7.8% growth estimate for the first half implies a sharp fall in the growth rate to 6.5% in the second half of the year. The industry-wise break-up of the CSO implies that the fall would be the sharpest in the construction sector—from 10.5% in the first half to 2.8%. However, given the continued increase in cement consumption, this estimate may have to be revised upwards.
While the economy did suffer a hit from the global liquidity crisis, its impact was neither as severe nor as long-lasting as most commentators would have had us believe. A good part of the credit for this recovery goes to the quick response to the crisis by the government and RBI. The damage is also limited because our growth trends are not really as “coupled” with the West as many have assumed.
The author heads the Centre for Monitoring Indian Economy
The Financial Express, February 11, 2009, Page 6
Mahesh Vyas
According to the Central Statistical Organisation’s advance estimates, India’s GDP would grow by 7.1% in 2008-09. This is higher than expectations. Most agencies had predicted a severe slowdown in growth this year, compared to the average growth of 9% recorded in the preceding three years. The median forecast of real GDP growth in 2008-09 according to the RBI’s Survey of Professional Forecasters was 6.8%. The lowest forecast of 6.3% is by the World Bank. More generally, there have been low expectations reflecting a sense of pessimism amongst commentators in the media and in business. CSO’s 7.1% growth estimate is reassuring compared to these gloomy prognostications.
An interesting statistical observation of the CSO’s advance estimates (AE) is that at least since 2001-02, in all but one year, these have been lower than the quick estimates (QE). Quick estimates are generated about ten months after the year is over and in many ways give the first estimate of growth based on reasonably sufficient data. And, they almost always show a higher estimate of GDP growth than the AE. The QE for 2007-08, released by the CSO a few days earlier was 9%, which was higher than the AE estimated earlier at 8.7%. If this recent past is any indication, then it is likely that the QE for 2008-09 would turn out to be higher than the 7.1% estimated in the CSO’s AE.
The AE has underestimated growth in 2008-09 because it was compelled to use an outdated index of industrial production. The IIP is based on a basket of products and weights that reflect the country’s industrial setting in 1993-94. We have changed dramatically since then. But, the IIP does not reflect this. As a result, it systematically underestimates growth. The degree of this underestimation keeps increasing as the years go by. The quarterly financial results of listed companies provide evidence that this underestimation is not small.
There are efforts underway to upgrade the IIP to a base year that is more recent. When these get reflected into a new series of the IIP, the GDP estimates for 2008-09 and the earlier years would look much better than they seem now.
2008-09 has been a challenging year to forecast. Growth forecasts have been revised downwards systematically during the year. The median forecast of the Professional Forecasters published by the RBI was 8.1% in April 2008. This declined to 7.9% in July and then to 7.7% in October 2008 before it came down to 6.8% in January 2009. The Economic Advisory Council of the Prime Minister had predicted a growth of 8.5% in January 2008. This was revised down to 7.7% in July 2008 and then to 7.1% in January 2009. Most forecasters feared high interest rates, high inflation and the RBI’s policy to suck out liquidity from the system. Additional fears were the extraordinary rise in crude oil prices and the slowing global economy.
The Indian economy survived high interest rates, high inflation and high crude oil prices well. It also survived RBI’s enthusiasm to rein in a misunderstood indicator for inflation—the wholesale price index, when they should have been targeting the consumer price index. Real GDP grew by a handsome 7.8% in the first half of the year. Growth could have been higher if RBI had been less enthusiastic. And, growth could have continued at a robust pace but for the extraordinary global liquidity crisis of September-October 2008.
We will have a measure of the damage that the global liquidity crisis inflicted on India when the CSO releases estimates of GDP growth in the October-December 2008 quarter. I expect it to be closer to 4.5%. But the economy will recover from this trough in the next quarter. Early indications are promising.
The area sown under rabi crops is up 4.1%. Maruti Suzuki and Tata Motors have reported a higher growth in sales in January 2009 compared to a year ago. So has TVS and Hero Honda in respect of two wheelers. Cement consumption continues to grow at a healthy pace. Production data had started to improve in December itself. Infrastructure sectors such as railways and ports that had recorded a steep fall in October and November recovered in December. Growth in consumption of petroleum products accelerated to 4.6% in December compared to 2.9% in November and 0.9% in October.
The CSO’s 7.1% growth for 2008-09 as a whole and its 7.8% growth estimate for the first half implies a sharp fall in the growth rate to 6.5% in the second half of the year. The industry-wise break-up of the CSO implies that the fall would be the sharpest in the construction sector—from 10.5% in the first half to 2.8%. However, given the continued increase in cement consumption, this estimate may have to be revised upwards.
While the economy did suffer a hit from the global liquidity crisis, its impact was neither as severe nor as long-lasting as most commentators would have had us believe. A good part of the credit for this recovery goes to the quick response to the crisis by the government and RBI. The damage is also limited because our growth trends are not really as “coupled” with the West as many have assumed.
The author heads the Centre for Monitoring Indian Economy
Posts
No comments:
Post a Comment