March 1, 2009 8:50:03 pm
Every non-government economist is certain to say – we told you so. The CSOs advance estimate of real GDP growth for 2008-09 was 7.1%. Riding on this,the government kept harping on 7% growth for 2009-10. For example,the interim budget suggested nominal GDP growth of 11% for 2009-10.
Assuming a GDP deflator of 4% (and indeed,inflation may be lower),this also suggests real growth of 7%. For 2008-09,we now have Q3 figures and the advance estimate was released before Q3 figures became available. In Q3,we have growth of 5.3%.
To refresh one’s memory,assorted models said the external slowdown should shave off between 1.5 and 2.5% from baseline growth.
Assuming baseline growth of 7.5%,we are down to between 5 and 6%. If that figure of 7.1% is to be attained,we need 7.6% growth in Q4. Since the Government has still not discarded the 7.1% figure,it presumably sets a lot of store by the three fiscal stimulus packages on 7th December,2nd January and 24th February,not to speak of monetary policy.
Lets also not forget that GDP growth tends to be concentrated in the second half of any fiscal year,since both agriculture and exports show high growth then.
Where did CSO go wrong in its advance estimates? Based on 3% and 2.7% growth in agriculture,forestry and fishing in Q1 and Q2,it expected this sector to grow by 2.6% for the full year. In Q3,it declined by 2.2%,partly a function of a higher base last year. Based on 5.6% and 5.0% in Q1 and Q2,CSO expected manufacturing to grow at 4.1% for the full year. Instead,in Q3,manufacturing declined by 0.2%. CSO didnt go far wrong on mining & quarrying,electricity,gas & water supply,construction and financing,insurance,real estate & business services.
But it went wrong on trade,hotels,transport & communications too. Based on 11.2% in Q1 and 10.7% in Q2,it expected 10.3% for the full year,as opposed to 6.8% in Q3. Finally,it went wrong on community,social & personal services too,the salvation for that 5.3% figure. Based on 8.5% in Q1 and 7.7% in Q2,CSO expected 9.3% for the full year. Courtesy the Pay Commission,Q3 delivered 17.3%.
Effectively,CSO went wrong because it extrapolated Q1 and Q2 performances to the rest of the year,regardless of what was happening. Extrapolation is fine when one is on a stable trajectory,but is a disaster when a sudden shock happens.
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