5% GDP growth? Nah! Economic astrology tells us why
The forecasts of the government's official GDP and other numbers are too precise to be useful. Economic astrology may be a better bet
A new emerging field for study and exposition is economic astrology. If astrology is about predicting an inexact (but broadly plausible) future using the exact placements of stars and planets, economic astrology is about making credible guesses about the future direction of the economy based on precise (but almost always wrong) forecasts thrown up by our economic Czars.
Economic astrology, rather than any econometric model, tells me that this year (2012-13) will be a bad growth year, next year could be better, and the year after that may be flat, if not equally bad. If you want numbers, I will say that this year will be 5-5.5 percent GDP growth, next year 5.5-6.25 percent, and the year after that around the same level (6-6.5 percent).
Why do I say this? This year's numbers are based more or less on the range within which forecasters have made their latest estimates, and five-sixths of the year is already over. Next year's is based on the simple assumption that election years are fiscal stimulus years. The year after that may be flat, because any new government will reap the harvest of five years of non-reform and excessive spending. So no further stimulus, only marginal tinkering.
Note the use of words like could, may and a wide range of forecasts.
Economic astrology gives me a near 50 percent chance of being right, since I only indicate broad direction and a range of growth possibilities (5-5.5 percent GDP) based on what has already happened on what could happen. I will go wrong only if we suddenly have another Lehman, a Black Swan event.
But official economic forecasters will usually be 100 percent wrong, since they try to give specific projections based only on known data.
Let's see how with yesterday's GDP forecast by the government's official number-cruncher, the Central Statistical Organisation (CSO), which gave us "advance estimates" of GDP in 2012-13 at 5 percent - a decade's low.
While the wonks at the CSO are surely bright guys and gals, one can say with 100 percent certainty that 5 percent will not be finally right. My 5-5.5 percent is more likely to be right.
Just one bit of evidence will confirm this: last year's CSO advance estimate put the GDP in 2011-12 at 6.9 percent. It ended up at 6.2 percent, and might still get revised further with 20/20 hindsight.
Moreover, the other star-gazers are not in alignment with the CSO number. The Planning Commission's resident Tarot Card reader, MS Ahluwalia, who has a direct line to Soothsayer No 1, MMS of 1991 fame, says the CSO can't be right. It must be looking into the rearview mirror instead of the crystal-ball, he says.
Says Ahluwalia: "I think it (growth projection of 5 percent) is very low. I have been told that CSO has taken data from April to November (2012-13) and they just projected it (advance estimates)."
The other Pandit accredited to the PMO, C Rangarajan, says the CSO has not thrown enough numbers to come up with the right forecast. "It is disappointing. My own estimate is when the full year data becomes available, it (GDP growth) can be revised upward."
And why does the PM's Economic Advisory Council Chairman think so? According to Business Standard, Rangarajan believes "there is a definitely a change in the investment climate. It will pick up in the fourth quarter. When actual data come, GDP growth will be 5.5 percent or more during the current financial year."
And next year? Rangarajan predicts 6.5-7 percent.
Now, next year is pure economic astrology, not forecasting.
The reason why we say this is simple: at a time when we don't know if the economy has turned around for sure or not, when we don't know how the rest of the world will grow, when we don't know where the rupee and capital flows are headed, predictions for 2013-14 cannot be made on the basis of any hard data or trends. You have to surmise it from what is likely to happen.
And what is likely to happen in 2013-14 is election after election, leading up to the big one in May 2014.
During elections years, GDP growth usually tends to pick up due to heavy spending both by government and political parties and candidates. A research report by Axis Capital, for example, says that the economy will receive an economic booster dose worth $13 billion - just around Rs 70,000 crore - due to election spending and the government's pre-election direct cash transfers scheme.
The report said: "This will be a result of a $8 billion poll 'stimulus' as 13 states will witness assembly elections culminating into the general election. This bunching of elections in a short span of time and the resultant poll spending will have important ramifications for consumption in FY14," Axis Capital said. Add the direct cash transfers money of $5 billion, and you get a $13 billion injection of steroids.
But if 2013-14 is going to see higher growth due to elections, the next year has to be one of hangover - which means fiscal correctives by the new government, which cannot but have a short-term deflationary effect. Hence the prediction of flat growth, as one presumes some of the steroids will still remain in the system post-elections to prevent a complete downturn.
Economic astrology is this better than precise economic projects. It makes all the difference between getting it right sometime, and getting it wrong all the time.
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