Advance estimates fail to gauge economy correctly in periods of uncertainty

Advance estimates have varied from actual numbers during 2008 crisis, Eurozone crisis, 'policy paralysis' and Covid lockdown years

Many, including Reserve Bank of India (RBI) Governor Shaktikanta Das, believe that the country's gross domestic product (GDP) growth has exceeded 7 per cent  for 2022-23. The first and second advance estimates for the year had projected a 7 per cent growth.

If the first actual number for the year, to be released on May 31, shows that GDP growth has indeed exceeded 7 per cent, it won’t be the first such variance between the advance estimates and provisional estimates. 

Advance estimates have varied from actual numbers during periods of uncertainties: whether it was during the global financial crisis of 2008-09; the Eurozone crisis of 2010-12; the ‘policy paralysis’ of 2013-14; the economic slowdown of 2019-20; or the coronavirus-induced lockdown years of 2020-21 and 2021-22.

Advance estimates are generally released for the Budget-making exercise. Since the Union Budget was presented generally on the 28th or the last working day (including Saturday) of February until 2015-16, there used to be only one advance estimates and it would come in by the first week of February or a couple of days after that.

Since 2017, the Union Budget has been presented on February 1. So the first advance estimates now come out in the first week of January. And the second advance estimates are also released on the last day of February to gauge the economy better.

Since the second advance estimates were introduced, it was only during 2016-17 that these estimates to gauge the GDP growth were on the dot. The next year, the growth was much higher than projected by the first advance estimates. The second advance estimates, however, captured it correctly. None of the two advance estimates could gauge the extent of the slowdown in the next two years and were grossly inaccurate, particularly for 2019-20.

The two advance estimates pegged the GDP’s rate of contraction much higher than it actually was due to the Covid-induced lockdown period of 2020-21. The advance estimates again overestimated the extent of recovery in 2021-22 since the effects of the Omicron variant and the Russia-Ukraine war were felt quite late in the year.