New Delhi: The director (research) at the Indian arm of Economist Intelligence Unit (EIU), Manoj Vohra, has not jumped on to the economic recovery bandwagon. He remains cautiously optimistic and has not seen the need to make any marked revisions to his forecasts in the wake of recent positive indicators. On the eve of EIU’s India Forecasting Forum meet, where policymakers and industry exchange analyses and forecasts, Vohra spoke about forecasting and EIU’s take on the economy. Edited excerpts:
How has forecasting been in the last year?
It has been extremely challenging, nightmarish and exciting. All at the same time. You have huge amount of unpredictability in the market... There have been rapid upgrades, revisions to our forecasts whenever we have seen that sustainability in the data. These are difficult times, but also times which perhaps would define a lot of new paradigms for policymakers, companies.
Lower forecast: EIU’s Manoj Vohra says India will grow only 6.3% in 2010-11 because of the challenges it will face in accelerating growth. Rajkumar / Mint
When you make the forecast, what is your primary objective? Do you try to get the precise number or do you try to catch the trend?
Both are important. You really need to have precise numbers. Secondly, the trend. Identifying an issue which you think can change things dramatically... When elections were held, internally, we had a view that the Congress (party) is going to come back to power. We really didn’t know they would come back to power with such a significant majority. That view led us to believe there is going to be a fair amount of stability in policymaking. So while many others were really cutting India’s forecasts, we stuck to our forecast. Those are qualitative factors which are difficult to capture by purely looking at numbers.
The third thing is consistency. We forecast 200 countries on a monthly basis. We need to make sure there is a consistency in our approach. Our forecasting setup is centralized. What we forecast at the global level feeds into our country forecasting units.
Seven or eight months ago, you had forecast that inflation would be a big challenge this year at a time when people were talking about the threat of deflation. What made you make that forecast?
There were two reasons. One was purely the base effect. Second, in India, inflation is a structural problem. If you look at the components of inflation which have long been not revised, you don’t really get a true picture of what the numbers tell you. So, you do have to look at the underlying categories and how they are likely to behave. I had said that it is a risk. No one can predict the monsoon in India. This time we had acute shortfall. Even if it is a scanty monsoon, you are going to have problems on the commodities side. That was risk and it is actually going to become a major challenge. Now, RBI (Reserve Bank of India) has to decide whether it should choose inflation or growth.
There is a new variable in the picture, which is the rupee. The first few days of October have seen about a couple of billion dollars put into the market by FIIs (foreign institutional investors). The rupee has strengthened. RBI has not intervened as yet. But should it intervene? At what level? Because if it does, it has implications again for capital inflows. Inflation in the Indian market has made things a lot more trickier than other emerging markets. In India, we are forecasting that this year we will perhaps see a fiscal deficit of 8% (of gross domestic product). I know the government has been saying 6.8%, but I think it is going to overshoot that target. While it may get the tax collections it is targeting, I think the expenditure side is where there could be problems.
I think we are going to need more stimulus. It may not be as massive. That again puts the government in a very difficult position. The whole reliance to improve the real economy is on the monetary policy, which, because of inflation and currency, is a very, very tricky affair. We do see interest rates hardening going forward. I think the phase of expansionary monetary policy is over.
We are forecasting that in the first quarter of 2010, RBI will increase interest rates by at least 25 basis points and that will be the beginning of a tightening monetary policy. At the end of 2010-11, you may have at least two more interest rate hikes. Before that, there is a distinct possibility that RBI may look at hiking CRR (cash reserve ratio) this quarter or next quarter. It’s just a matter of time. That is happening because of the threat of inflationary pressures building up.
While the numbers are good, you are saying that it’s a false dawn and we have huge challenges. Last year, it was monetary policy which was the first line of defence, this year we don’t have much space there either.
Well, those green shoots are true. Let us be fair. Positive data coming out globally is true. But a part (of it) has been because of huge government spending in the first two quarters, and secondly, you have had huge liquidity in the market. That is going to change to some extent. As I had said, don’t expect the government to pump in money quarter after quarter. If interest rates go up, indeed next quarter, then even access to capital, which was relatively easy, will no longer be the case.
Yes, there are serious challenges to growth. I read many analysts talk about 2010-11, you are going to have 8.5-9% rate of growth. I strongly disagree. That will not happen. Our forecast for 2010-11 is 6.3% growth because we do see pressures remaining for the next fiscal year. We do see challenges India would face for accelerating growth. A part of it is because of the issues on the domestic front.
When we talk of India’s growth, we have to talk of what is happening globally. Globally, things have improved but there are risks. I do see a period of uncertainty continuing in the global economy.
It’s a slightly more pessimistic outlook as compared with what one generally comes across these days.
When you look at India in a silo, our forecast for growth slowing from 9% to 5.5%, which is our forecast for 2009-10, seems pessimistic. When you look at emerging Asia, India has done tremendously well. Before the crisis, you had emerging markets in Latin America, you had emerging markets in Eastern Europe, you had emerging markets in Asia. Eastern Europe had virtually declared, ‘we are the next Asia’. They are down, they have huge external financing needs, which is a nightmare in these times. Latin America is performing worse than Asia. In Asia, it is actually India and China which, in the worst crisis in recent history, are still performing good numbers. But it could have done better. There is a structural problem with inflation. That does undermine our growth potential. We believe India has performed really well despite all constraints, despite everything. It has huge potential.
Getting back to inflation, which you have identified as a structural problem, the 10 percentage points difference you see today between the wholesale price index and different consumer price indices, what message does that give you?
The biggest message is, we need to revise our indices. If one revised the consumption basket, the contribution of food would be lower by at least 3-4 percentage points. The nature of the consumption basket has changed... I know the CSO (Central Statistical Organisation) has been working on it.
You said you were looking at an 8% fiscal deficit. Why is that?
Two things. If you look at the first six months of tax collection data, we are pretty much on target. How the next six months pan out is anyone’s call. We do believe there is a risk on that.
Second, the government has been trying to cut expenditure. Unfortunately, we had natural calamities, floods. There are going to be some relief measures. There is going to be some cost for sure.
I see pressure on both the revenue side of the government and the expenditure side, which would result in a slightly higher fiscal deficit than the government is targeting.