Wishful thinking?

Too many projections, too little scenario building

The projection for economic growth during 2013-14 announced by the Prime Minister's Economic Advisory Council (PMEAC) on Tuesday, at 6.4 per cent, lies at the optimistic end of the current range. Most analysts expect the current year to be better than 2012-13, for which the advance estimates suggest that the economy grew by a sluggish five per cent. However, few outside the government are being so bold as to forecast such a significant turnaround. Even the Economic Survey presented by the ministry of finance projected a range of 6.1 per cent to 6.7 per cent, indicating that several unpredictable factors were very much in play, making it difficult to commit to a precise number. The PMEAC clearly decided that the margin of error was small enough to warrant such a commitment.

Of course, the devil is in the nuances and the report is quite explicit in laying out the requirements, particularly on the policy front, for this relatively rosy forecast to be realised. It echoes the widely held view that accelerating investment activity by facilitating large projects is key. However, it departs from another equally widely held view that the Cabinet Committee on Investment will simply not be able to achieve this. While things may improve over time, the first few months of this structure's functioning do not provide evidence of the dramatic speeding-up in decision making that is needed. If indeed the efficiency of this process is the lynchpin of a growth recovery, the growth optimism may simply be wishful thinking. This is all the more significant in a pre-election year, during which political forces will have an enormous influence on decision making. The general perception is that things slow down even more, leading to a kind of self-fulfilling prophecy for investment decisions. Implementation of large projects may well have to wait until the next regime is in place, at the very least.

Of course, the report goes much beyond simple projections. It does well to highlight the critical problem of capital productivity. So much of the economy's capital asset base is being underutilised because of mismatches. For example, an impressive expansion of power generation capacity is unable to deliver on its promise because of coal shortages. This problem has certainly contributed to slowing growth, but there is no solution in sight, Cabinet committee or no Cabinet committee. Similarly, its estimate of the current account deficit for 2013-14 should force some quick responses to the many factors driving it. At $100 billion, it is going to be extremely challenging to finance, which will heighten perceptions of currency risk over the year. The relatively stable rupee of the past few months may turn out to be short-lived.

Ultimately, with so many projections being published each quarter, even from within the government, the value of a somewhat bland baseline forecast by the PMEAC is questionable. It would be much more useful as an input into policy making if it were to provide best-case and worst-case projections as well. In this instance, what it believes the growth rate would be if none of the actions it mentions is taken by government would be very revealing. Perhaps it could come out with a supplementary report in short order.