Why FinMin, CSO may both go wrong on GDP forecast

Neither the finance ministry nor the Central Statistics Office (CSO) is likely to be a winner in the dispute over gross domestic product (GDP) numbers for the current financial year.

The provisional numbers of GDP data for the current financial year, to be out on May 31, are likely to fall between 5 and 5.5 per cent.

When CSO came out with advance estimates of 5 per cent economic growth for the current financial year, it surprised the finance ministry as much as that it had issued a press statement to say growth would be at least 5.5 per cent when the actual data came.

The ministry said CSO based its advance estimates on the data until November or December, depending on availability.

This, according to the ministry, makes its estimates accurate when GDP growth is following a trend, but not when it is turning. The ministry believed the economy would see a positive impact of reform measures it had taken since September 2012.

In the reform push, the government allowed foreign direct investment in multi-brand retail and civil aviation, announced a road map for fiscal consolidation and set up a high-powered Cabinet committee to expedite clearance of mega infrastructure projects of Rs 1,000 crore (Rs 10 billion).

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"It's, therefore, likely that the advance estimates of 5 percent will be revised and the final estimate will be closer to the government's estimate of 5.5 percent or slightly more," the ministry said.

But now, CSO has also come out with the third quarter GDP data. Growth fell to a 45-month low of 4.5 per cent against 6 per cent in the corresponding period of the previous fiscal.

For the first nine months, economic growth turned out to be 5 per cent against 6.6 per cent in the corresponding period of 2011-12.

It has now become pretty clear that GDP would not expand by 5.5 per cent this financial year when the first actual provisional data would come around May-end, dashing the hopes of the finance ministry.

When Finance Minister P Chidambaram was told at the post-Budget press conference that the third-quarter GDP data was not in line with his ministry's optimism on 2012-13 economic growth, he had said he relied on the advice of his advisors.

However, economic growth may not fall as low as CSO's advance estimates of 5 per cent either.

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For the economy to grow by 5.5 per cent, GDP must grow by 6.76 per cent in the fourth quarter of the current financial year. But for 5 per cent growth, it must expand by 4.73 per cent in this quarter.

The economy could easily grow 4.73 per cent in the fourth quarter, as the base of 2011-12 was too low at 5.3 per cent.

However, the economy is not likely to grow 6.76 per cent, even on a low base and expectations of policy makers that reforms would yield better results in the fourth quarter of the current financial year.

"The growth might fall between 5 and 5.5 per cent," Crisil chief economist D K Joshi said. However, he added it was of little consequence as both - "5 per cent growth rate and 5.5 per cent growth rate" - would be a 10-year low.

When pointed to Parthasarathi Shome, advisor to the finance minister, that the actual GDP data might not be 5.5 per cent as estimated by the finance ministry, he recalled that he used to see 13 different GDP projections by various agencies such as treasury and tax department in the UK, when he was the chief economist at Her Majesty's Revenue and Customs (HMRC).

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Credit Suisse had said India had probably underestimated its third quarter growth at 4.5 per cent. Even if so, the first correction would not happen before January 31, 2014.

The first actual data (provisional) for 2012-13 will come towards May-end this year and its first revision will happen on January 31, 2014.

By the time, it would be of more interest to look at economic growth of 2013-14, which may of course be affected by 2012-13 growth because of base.

For the next financial year, the Budget has assumed a growth rate of 6.4 per cent. Joshi said Crisil had also estimated the growth to be 6.4 per cent. But this estimate is also based on the assumption of normal monsoon, indication of which is yet to come, he said.

Asked whether reforms initiated by the government since September 2012 and the Budget focus on fiscal consolidation would help the economy achieve the number that it is projecting for 2013-14, Joshi said these measures would help uplift sentiments but actual boost to the economy will come if investment picks up and faster clearance to projects are given.

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Union Budget, as it unfolded on February 28

Complete coverage: Union Budget 2013-14

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