India GDP: Are private forecasters taking a shot in the dark?

On Tuesday, immediately after Prime Minister Narendra Modi announced the extension of the nationwide lockdown till May 3, private forecasters and the International Monetary Fund (IMF) rushed to cut India’s Gross Domestic Product (GDP) projections. It almost appeared like a competition on which agency dishes out the most pessimistic projection first. All this when the real economic impact of the COVID-19 outbreak is still a big source of uncertainty for governments and central banks across the world.

The first downward revision from Barclays emerging markets research has cut India’s calendar year 2020 GDP forecast to zero from 2.5 percent earlier. This was followed by Icra. The agency went one step further to predict a possible contraction (negative growth) in GDP to negative one percent in FY21. Then came Nomura which announced a likely contraction in growth at -0.5 percent in India GDP in 2020.

While private forecasters had a field day in downgrading India growth predictions, the IMF forecast appeared to be the most perplexing one. The Fund cut the growth projection for the fiscal year 2021 to 1.9 percent but said next fiscal year, the growth could rebound to 7.4 percent. Even after factoring in the base effect, such a prediction showing a sharp reversal, that too when the COVID-19 fight is still halfway, looked confusing.

Question is how did these agencies that have predicted zero to negative growth for India citing coronavirus, assess the COVID-19 economic impact already? Even during the ‘normal’ times, these agencies, including IMF, have got their predictions far off the mark often. The predictions run a greater risk at this stage given the uncertainty on the COVID-19 situation.

But the key point here is that everything depends on how soon India contains the virus spread. The fact is that there is a great deal of uncertainty at this stage on the COVID-19 economic fallout. The future course that the Indian economy will take highly depends on the fiscal response the government will adopt and the extent of the virus infections. This is why the drastic cuts in GDP forecasts look premature.

A look at the IMF’s GDP predictions over the last one year wouldn’t inspire much confidence to an observer in terms of accuracy of predictions. Consider this: In January 2019, the IMF predicted that India’s GDP, for FY2020, will grow at 7.5 percent. This was revised down to 7.3 percent in April, further to 7 percent in July, 6.1 percent in October and finally to 4.8 percent in January 2020. In other words, IMF’s chief economist Gita Gopinath, who was bullish on India in January 2019, was of a pessimistic view on India, all in a year.

Before the COVID-19 onslaught on the world economy, including India, there were no major economic events happened in 2019 that could have fundamentally altered the economic assessment on the GDP. This raises questions on the models that the IMF and other private forecasters follow in assessing economic conditions. In hindsight, it is worth asking whether these calls possessed any deep insight or offered value to the larger audience.

The economic cost of the COVID-19 lockdown on India is still a matter of debate. Barclays estimates close to $234.4 billion (8.1 percent of GDP) impact. But this prediction assumes a partial, nationwide lockdown at least until the end of May. Earlier, Barclays had estimated $120 billion as the economic cost of the shutdown. On Tuesday, PM Modi said in a televised statement that the nationwide lockdown will be extended till May 3. India just completed a 21-day lockdown announced in late March. Post-April 20, some areas may see partial relaxation depending upon the trend on virus infections, Modi said. But all depends on how the COVID-19 scenario plays out.