Game of Estimation

Forecasts of GDP growth and inflation are risky and prone to major corrections over time

- ANAND ADHIKARI

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?