Surjit S Bhalla: Forecasts are not DNA-proof

China- and India-led decoupling growth might save the world and allow a V-shaped trajectory to emerge from the massacre of Oct-Dec 2008.

There has been an interesting and intriguing response to my earlier articles (Business Standard, March 3 and 21, 2009) on GDP growth. These articles concluded that Indian GDP growth for the fiscal year 2008/9 would be much lower than the consensus estimate of around 6.5 per cent. Further, that India had not been insulated by the Great Recession 2008 — the decline in Indian GDP growth from a year ago was comparable to most other developed and developing countries.

These conclusions were based on very standard seasonal adjustments to GDP data. So standard that the US does not even publish non-seasonally-adjusted GDP data!

That some “experts” misinterpret seasonal adjustments is par for the course and acceptable. What is irksome is that these so-called experts infer future growth possibilities from seasonal adjustments. This is so wrong that it needs to be forcefully exposed. Seasonal adjustments provide a better understanding of what has happened in the past. Period. Seasonal adjustment is better accounting, that’s all. Prediction of the future of GDP, or inflation, or the weather is entirely a function of the “model” being used, psychological or otherwise. Forecasts per se have nothing to do with the use, or misuse, of seasonal adjustments.

But what has irked me the most is the accusation that I am a pessimist. The logic being that since my forecast for the past is low growth, so it has to be for the future. This is bothersome because I strongly believe that whether one is an optimist or a pessimist is really a function of one’s DNA. Now one might quibble and state that the environment in early childhood dictates which mist one enters. Possible, and I would appreciate knowing about research on this aspect of human psychology. For the moment, I want to emphasise that barring accidents and unusual events and all the usual caveats, most of us fall into the optimist or pessimist or bull or bear camp as a reflexive reaction to our DNA.

In my case, that means that my bias is always to see the glass as more than half-full, to always err on the side of hope. Hence my resentment at the accusation that my outlook for the Indian economy is gloomy. Far from it. Indeed, I believe that the Indian economy will likely register close to 7 to 8 per cent growth for the fiscal year (April to March) 2009/10. Am I letting my DNA get the better of me? Perhaps — you be the judge. Fair is fair.

The international organisations (driven by the DNA of their lead forecasters?) have gone beside themselves in arguing that the world is not only in deep trouble (true) but is likely to be in this morbid state for the next few years (not so obvious). Today, an optimistic forecast is that the world records negative growth in 2009  with the lead player, the US, recording around minus 2 per cent.

These forecasts are based on an unstable post-Lehman world and this might be the Achilles heel. When all the data are in, the quarter Oct-Dec 2008 will probably be the worst world GDP quarter ever. Yes, I am including the period of the Great Depression. Output fell off a cliff, froze, dropped dead — use whatever metaphor, you get the same reality. The quarter was a classic Black Swan event — unpredictable in magnitude, but nevertheless real, too real.

How deep into output, and psyche, will Oct-Dec 2008 penetrate? A simple answer — very deep. Why? Because the US is the engine of growth, the US consumer the lead saviour. History should repeat itself and we all have to wait until both the housing sector in the US stabilises and the US consumer begins to at least tiptoe back into the malls.

This extrapolation makes the coupling mistake. Oct-Dec has made us all couplers — the entire world is led by the American Pied Piper. We saw what happened, didn’t we? Some of us had argued for decoupling and since October we have been welcomed by jeers. How could we be so foolish to believe that the world had changed? China and India to lead the world out of this deep recession? Hah — optimists going wild. Don’t you know that China and India together have a GDP of close to $5 trillion, much less than the US GDP of $14 trillion?

But recovery (or decline) is not about levels of GDP, but change in the levels. If US grows at 2 per cent it adds $280 billion to world output. The same is achieved by the China-India juggernaut growing at “only” 5.6 per cent. Between 1980 and 2008, these economies grew at an average rate of 8 per cent per annum; in the last eight years, even higher. This high growth rate has had an effect. In 2000, China and India accounted for only 17 per cent of US output; today, they account for exactly double. So what might have been unthinkable eight years ago is very thinkable today.

By repeating the refrain of coupling, and by concentrating too much on the Black Swan-induced Western economies, the experts may be missing out on a genuine possibility. Led by China and India, and all the monetary and fiscal stimulus packages (not India whose policymakers are always reactive), the world might actually see a V-like economic recovery. What every expert and lay person and everyone in between has given up on may be the new Black Swan event of 2009! And precisely because the output cut in the Lehman quarter was so deep. Bottom line: my admittedly risky forecast for Indian and world growth for 2009: both China and India to grow at around 7 to 8 per cent, and the Western world joining the recovery bandwagon by end-2009.

The author is Chairman of Oxus Investments and anchor of Tough Talk, a talk show on NDTV Profit

surjit.bhalla@oxusinvestments.com