Moneycontrol Pro Panorama | The stories we tell ourselves

Dear Reader,

Forecasting is a booming business, and it wears a credibility cloak by using hard data. Every day we are bombarded with projections whether it is about stock valuations, economic growth or when and how hard Mother Nature would hit us with her natural disasters.

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But forecasting is nothing but a story, one that the forecaster believes will come true and then proceeds to convince others. “Every forecast takes a number from today and multiplies it by a story about tomorrow,” writes Morgan Housel, the author of 'Psychology of Money and Same as Ever'.

But we can’t abandon forecasting because markets run on the belief of a tomorrow. That tomorrow needs to be reasonably defined and must be squeezed into a reasonably rational narrative. More importantly, policymaking rests firmly on forecasts. Without forecasts or projections, fiscal and monetary policy will have nothing to start off with. To that extent, the faith of markets in projections and forecasts must be appreciated. After all, without projections how can we bet on the future of a company, or even a country?

What investors can do is separate the plausible from the outlandish.

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The trouble starts when forecasters forget that their estimates are just stories that they tell themselves. Projections may look like hard numbers because they use data, but much of them is just subjective opinion. The opinion part is what makes some forecasts believable and others outlandish. Policymakers and central bankers also suffer from this. Recall the botched inflation projections of the Reserve Bank of India during 2020-22 because of an unpredictable pandemic and wars among commodity-producing countries. The central bank can be forgiven because of one-off events, but its projections have come horribly wrong in the past as well. Even the US Federal Reserve Chairman Jerome Powell’s projections of a transitory inflation turned out be completely wrong.

Not just macros but forecasts about a company can also go wrong. For example, the stock price projections and even the business projections of One97 Communications, the owner of Paytm, turned out to be wrong. Sometimes analysts indulge in long-term projections too, such as earnings projections of 50 years hence. These would come under the outlandish tag because the probability of them coming true is significantly reduced by the amount of time required to wait. More fiction stories are created in excel spreadsheets than word documents!

Projections are also children of interpretation. Present day data needs to be interpreted to make projections and this is fraught with risks. Just look at the monetary policy committee members who are interpreting the same data and predicting diametrically opposite policy prescriptions based on what they forecast. Dinesh Unnikrishnan captures part of this in his piece here. Two MPC members believe that real rates are restrictive while others point out that they are not. Both sides agree that the potential growth rate of Indian economy has increased. Jayanth Varma forecasts a higher growth sacrifice and points out that hope that private investments will rebound has not materialized yet. “..we have been hoping for this revival for many quarters now, and hope is not a strategy,” he said according to the minutes of the meeting. In his interview with Moneycontrol Pro, Varma predicts that high rates will depress investments. Michael Patra, Deputy Governor, RBI, believes that demand conditions are strong and actual output is running ahead of potential output even though decadal low core inflation suggests otherwise.

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Whose story is correct?

For that matter, what are the odds of the myriad projections of India’s GDP growth given by forecasters, from IMF to the RBI and even the government, coming true?

If policymaking rests on such subjective probabilities, market valuation forecasts are at best a shot in the dark. Analysts at Kotak Institutional Equities have been calling out the recent valuations of the market as froth in multiple reports now. Sanjeev Prasad, managing director and co-head, in his interview with Moneycontrol Pro, pointed out that retail investors are entirely convinced that future returns will be like the past. In short, they believe steadfastly in their story of a booming Indian equity market.

Part of it is the series of projections that forecasters have been throwing at us for the past several years. The IMF projected India to be $5 trillion economy by 2026-27. Chief Economic Advisor Anantha Nageswaran projected $7 trillion GDP by 2030 last year. Finance Minister Nirmala Sitharaman has projected $30 trillion economy by 2047 in line with the government’s mission to make India a developed nation by then. The latest prediction is by 16h Finance Commission Chairman Arvind Panagariya who believes India can be $50 trillion economy by 2050.

Do these projections seem outlandish, or can they come true? Note that all of them have come out by adding the stories that we believe to the current GDP growth figure. In Housel’s words, “A fact multiplied by a story always equals something less than a fact.” This is why forecasting is a tricky business, but a booming one.

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