Vivek Kaul: India’s GDP growth slump holds lessons in forecasting

A Mint poll of 26 economists had predicted median growth of 6.5%. This deviation of the actual from the expected raises a few points.

Also read: India’s GDP growth shocker: Bad news can be good too

First, the GDP growth rate was way off most forecasts. These projections typically tend to cluster and very few deviate significantly.

Those in the forecasting business seem to be believers in what economist John Maynard Keynes wrote in The General Theory of Employment, Interest and Money: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

Essentially, market analysts and economists have an incentive to echo each other. They want to come up with forecasts that are similar, if not the same, as those made by others because they don’t want to be wrong when the majority gets it right.

They only want to be wrong when the majority also gets it wrong. So, while making a forecast, they are devoting their “intelligences to anticipating what average opinion expects the average opinion to be."

Second, it’s not just private forecasters who got it wrong. So did the Reserve Bank of India (RBI). The monetary policy committee of RBI in its October statement had said that GDP growth would be 7%. The State of the Economy report released in November expected growth of 6.7%.

Third, forecasters have got back to the business of trying to maintain a status quo. GDP growth during July to September has been called a temporary blip. Maybe it’s temporary. Maybe it isn’t. But how can individuals who have just got a forecast so horribly wrong be so sure about the very next one? That’s a question well worth asking.

Fourth, this brings us back to the much broader question of the confidence with which such forecasts are made. In fact, determining the economic size of a country is a complex task.

So, how can forecasts be made with such precision, down to the last decimal point? Or as Zahaan Bharmal writes in The Art of Physics: Eight Elegant Ideas to Make Sense of Everything: “Blithe predictions… cannot be made in a complex system where the impossibility of accurate prediction is inbuilt." An economy is a complex system. So, why aren’t range-bound forecasts made, at least by private players in the business?

Also read: Mint Primer | Slowdown: Time to recalibrate India’s growth story in FY25?

Fifth, there seems to be a certain reluctance to acknowledge the slowdown in the formal part of the economy. Data from the Centre for Monitoring Indian Economy shows that during July to September, the aggregate net sales of 3,360 listed non-financial firms grew just 3.9% in comparison to a year earlier. Their aggregate net profit grew 1.5%.

In fact, the net sales of listed non-financial firms reached a recent high of 37.2% of GDP during July to September 2022 and have been seeing a downward trend since. They have been at 31.3% of GDP in the last two quarters.

Gains made by the formal sector because of the destruction of the informal sector in the aftermath of demonetization, implementation of the goods and services tax and the covid pandemic seem to be running out of steam. The net profit of these firms has moved in the range of 2.4-2.8% of GDP from the start of 2023-24.

Sixth, there is a great belief, particularly among market analysts, that the marriage season will rescue the Indian economy. Of course, when people spend money to get their progeny married, it benefits the economy. However, it’s also important to consider whether this increased spending is driven by people taking on more loans.

Indeed, loans against gold jewellery given by banks grew by more than 56% in October in comparison to October 2023. They had grown by 51% in September and 41% in August. Now, it can be argued that this might be a function of an increase in gold prices. But then, it is debt that will have to be repaid.

Also, this increase has occurred right before and during the festive and marriage season. Does that tell us something? Why are these questions not being asked? Also, banks aren’t the only institutions giving out gold loans. Non-banking financial companies also do, and there is a large informal market on top of that.

Seventh, calls for greater spending by the government have started. From April to October, the first seven months of 2024-25, the government has spent a little over 51% of its budgeted expenditure for the year. When it comes to capital expenditure, only 42% has been spent. So, there is still some gas in the tank on this front and that should pump some economic growth in the second half of the year.

Nonetheless, if the government has to spend more than it has budgeted, that money has to come from somewhere—either through higher taxes or higher borrowing, and both have their own economic impact. These points should be thought through before general calls are made for the government to spend more.

Also read: RBI’s GDP projections on test as India’s Q2 GDP growth falls short

Finally, those in the forecasting business have an incentive to be optimistic. Nonetheless, sometimes it might just be worth their while to be realistic.