Deep pessimism about Indian GDP growth (only 7 per cent for 2008-09) does not appear to be justified on the basis of evidence available today.
The race to the bottom is on. Just on Thursday the investment banks (and their economists who never have to put their money where their pen is!) were gleefully overstepping themselves, and each other, trying to forecast rupee/dollar at 33, and Indian GDP growth at 10 per cent. The same herd mentality was seen on Friday. Someone has 8 per cent growth, then I must go for 7.5; oops, that is taken, so I will go for 7 per cent.
This article is written to introduce accountability. After all, we humble money managers are held accountable every minute of every day -- by the market. And the market is in part driven by the sophisticated estimates of GDP growth and the stock market of the investment banks. Perhaps the editor can institute prizes for the Best (and Worst) forecasting record.
The table gives the present collection of growth estimates. Three very blue chip investment banks are clustered at 7 per cent (HSBC, JP Morgan Chase and Morgan Stanley). It takes a brave (and perhaps stupid) soul to go against the collective might of these three, but since there is the possibility of a prize next year, let me step forward!
Oxus' estimate of GDP growth for India is 9 per cent for 2008-09. If I am wrong, I will have the satisfaction of being largely right regarding the estimate for 2007/08!
Reasons for optimism -- several. (It is worthy of investigation whether humans are hard-wired with respect to seeing the glass as half-full or half-empty.) Everybody is a big bear these days. Just like Rockefeller knew that there was a crash coming in 1929 because his shoeshine boy asked him for stock tips, so it is likely that the economy has hit the bottom when everyone is not only an economist, but an articulate, and 'accurate', macro-economist! Paul Samuelson famously said, "Economists have predicted 10 of the last 2 recessions."
There are several reasons cited by the pessimists. The doomsayers have apparently concluded that not only is the US recession a certainty, but that it will be a deep one, lasting much more than six months.
There are dire warnings of the Return of the Great Depression, and if that movie is too scary for you, there is a light hearted version: US and Japan: Spot the difference. In reality, the likelihood of a plain vanilla recession is perhaps 60 per cent; the chances of doom a Black Swan probability.
In addition, there is a better than even chance that Bernanke's imaginative and forceful handling of the crisis will work.
But what about growth coupling? Large parts of the world are yet to show any significant deceleration in GDP growth in response to the US slowdown.
Whether it is China, or Korea, or Brazil, or Mexico, or even the euro area, growth slowdown is absent. India has shown a significant slowdown, but that is entirely due to our misguided policy on exchange rates and interest rates. Another useful statistic to note is the changing share in world GDP growth, in US dollars, of India and China.
Today this share, at 20 per cent, is equal to that of the US. This means that the world now has a reverse cushion, i.e. far from India catching pneumonia (growth of 7 per cent) when America sneezes, it is probable that America does not catch a cold, i.e. no US recession.
The pessimists perhaps are assuming that 10 per cent real interest rates in India will continue indefinitely. Such levels of real interest rates are rare in India, and even rarer in the free world. The last time such heights were reached was during the mid to late 1990s.
In contrast, China, and most of Asia, face real rates in the neighbourhood of 1 to 2 per cent. This situation cannot continue, must not continue. However, it is well-known that interest rates are not made by economists (or journalists!) but by the RBI.
What possibility is there that the RBI will change course over the next year? Actually, not small. The incumbent governor, Dr Y V Reddy, is due to retire in September 2008. His policies have been of the ECB variety, strict monetarism. What is the likelihood that we will get another strict monetarist to succeed Reddy? Small, since age restrictions rule out most monetarists.
So, interest rates in 2008-09 should be helpful in facilitating growth, and therefore making 7 per cent GDP growth too pessimistic.
The probability of India seeing 7 per cent growth in 2008-09 is just as likely as the rupee being Rs 37/$ in 2008 -- a forecast of most of the investment banks mentioned in the table. The GDP growth forecast is likely to be wrong for the same reason, i.e. it is most likely based on the logic of Wall Street cocktail party talk rather than the logic of economics.
In the last five years (since 2002), the investment/GDP ratio (a prime determinant of higher GDP growth) has increased by 13.7 percentage points to 39 per cent today. How many country-year observations (excluding small and oil countries) are there with an investment rate above 39 per cent and a growth rate below 7 per cent? Less than 20 or a probability of less than .003 per cent.
The competition is on -- in a year, we will know the winner; next week, an analysis of inflation forecasting.
The author is Chairman, Oxus Investments, a New Delhi-based asset management company. The views expressed are personal. surjit.bhalla@oxusinvestments.com
