Multiple revisions by the Reserve Bank of India in its projections for growth and inflation have caused concern within the government about these being off the mark from actual numbers. At least two ministries are learnt to have red-flagged this and discussions have been held for developing another mechanism for periodic inflation and growth forecast.
Though at initial stages, the ministries are learnt to have held internal consultations for developing a system for projecting price trends and growth forecasts, distinct from the actual data collection and estimates currently done by departments such as the National Statistical Office.
“For any agency, there are bound to be differences between actual numbers and projections. The RBI’s projections have proven to be wrong,” a senior government official said. An official from another key economic ministry told The Indian Express, “Some discussions have been held for developing a forecasting model, even if it is done internally.”
In recent times, the RBI’s first projection of growth has consistently been at a higher level than the actual estimates, and underestimated inflation. The RBI’s first projection of GDP growth for the April-June quarter was 17.2 per cent; it was revised down to 16.2 per cent in three consecutive policy reviews. The growth estimate, released by the NSO on August 31, turned out to be 13.5 per cent.
In the latest monetary policy review Friday, the RBI raised the GDP projection for Q3 and Q4 to 4.6 per cent each, resulting in the total GDP growth projection for the year to come in at 7.0 per cent. This compares with initial forecasts of lower growth – 4.3 per cent and 4.1 per cent for Q3, and 4.5 per cent and 4.0 per cent for Q4. This presents a paradox of sorts, given that the growth projections have been revised upwards in a rising interest rate cycle, which is typically expected to dampen growth. For Q2, however, while the initial projection was 7.8 per cent, it was cut to 6.2 per cent, but has now been raised to 6.3 per cent.
Similarly, the GDP growth for Q4 in 2021-22 was initially projected to be 6.2 per cent, scaled up to 6.6 per cent, later scaled down to 6.1 per cent and then 6 per cent; actual estimate by the NSO turned out to be 4.1 per cent.
On the inflation side, the RBI has underestimated retail inflation rate from the actual inflation numbers in the last 15 quarters, with the difference ranging from 0.4 percentage points to 3 percentage points (including the Covid-19 pandemic period of April-June 2020). The trend was different before October-December 2019, when the RBI was actually overestimating inflation rates in its projections as against the actual numbers. Between 2017-18 and 2018-19, the RBI had overestimated inflation rates as against the actual numbers in at least eight quarters.
One reason being cited for being off the mark is that the RBI relies on a survey of household inflation expectations to firm up projections in its monetary policy statements and since these are “backward-looking” in nature, the household surveys on inflation tend to be off the mark. The data collection for inflation and growth is done by the NSO based on inputs from its field enumerators.
Queries sent to the Reserve Bank of India and the Union Ministry of Finance on the issue by The Indian Express went unanswered.
The divergence in the inflation projections made by the RBI were earlier flagged by then Chief Economic Advisor Arvind Subramanian. In August 2017, Subramanian, who was the CEA then, had criticised forecast errors saying, “In this view, not just headline inflation has been running well below the target so far, but even core inflation… has also declined sharply. In this view, inflation forecast errors by the RBI have been large and systematically one-sided in overstating inflation.”
The RBI is just one month short of overshooting its inflation target for three consecutive quarters following which it will have to formally explain to the government the reasons for the breach in the 4 per cent plus/ minus 2 per cent inflation target. Including Friday’s rate hike, the RBI has hiked the repo rate by 190 basis points since May this year.