You look to the left, you look to the right. No difference. Nor is there any difference if one looks forward or backward. There is a surprising regularity, a genuine convergence, in the forecasts of GDP growth for India in this recovery year 2009/10. The low-ball forecast is that of the IMF, which believes that India will grow at only 5.4 per cent this year, somewhat lower than the 6.7 per cent registered in 2008/09.
This pattern, GDP growth lower in the present recovery year than in the previous recession year, is followed by most analysts e.g. ICRIER, NCAER, Economic Advisory Council, Goldman Sachs, Morgan Stanley, to name just a prominent few. Curiously, the only exception to the pattern is our own GOI, which is boldly sticking to 7 per cent (Arvind Virmani, Ministry of Finance).
Who will be right? Let us examine some facts. Both for India, and the rest of the world, the worst two quarters of GDP growth were the Lehman quarter, Oct-Dec. 2008, and the follow-through first quarter of 2009. However, the Indian fiscal year runs from April to March; this means that the fiscal year 2009/10 will not contain either of these two worst quarters. Everyone accepts that last year was a mega-Black Swan event, and mega in two different ways. The swans were big, indeed the biggest in close to a 100 years; and the black swans were many. There was the commodity price boom, and bust; there was the oil price extravaganza, and bust. There was the banking bust and the stock market cliff diving.
These extraordinary events can affect the world economy in two distinct ways. The structure of the economy can change, and change obviously for the worse. In other words, one could reasonably argue that the potential trend rate of growth is lowered. This seems to be the implicit assumption of many of the forecasters, led by the IMF. An alternative assumption is that 2008 will not have a permanent effect on future growth. In other words, the structure of the world economy remains intact, that the growth distribution, or the probability distribution of growth, remains the same. Now, 2008 was an extreme event, a very unlikely event, but nevertheless, one from the same inherent structure. In due course, the world economy should get back to the same trend rate of growth that it was enjoying previously. If the alternative scenario does emerge in the long run, then there is a short-run implication as well. It is that the recovery in the short run is likely to be V-shaped. Since the decline was steep, the likelihood is that recovery will be equally sharp.
Recent data favors the optimists. Indian GDP grew at a seasonally adjusted annualised rate (SAAR) of 7.7 per cent, April-June 2009. Industrial production growth over the last three months (June-July-August) is proceeding at a very healthy SAAR of 14 per cent. This implies that even with some slowdown in September, GDP growth for the July-September period is likely to be close to 8 per cent, and this after incorporating a downdraft due to the drought and negative agricultural growth for the quarter. Adding up, a very likely possibility is that GDP growth in India for the first half of the fiscal year will be close to 8 per cent. For the full fiscal year it may well be higher, especially if the present trends continue.
The RBI meets later this month to decide on the future course of monetary policy. It has evidence that CPI inflation is staying stubbornly high at double digit levels. It has evidence that the wholesale price index is also increasing at a rapid clip (three-month annualised SAR close to 8 per cent). It also has evidence that the latter increase is mostly due to food and food articles. There has emerged a wide gap between manufacturing WPI inflation and overall WPI inflation. For the three- and six-month periods ending in September, the former is showing only a 5 and 3 per cent SAAR.
There is a strong likelihood that food inflation has peaked, especially if one considers the political economy. While food prices peaked and troughed in the world in 2008, they only went one way, higher, in India. Why this differing pattern? Because India is a great democracy and national elections were held in May 2009. And since state elections in major states were held earlier this month, well, food prices could not come down. Miraculously, however, we are likely to witness a moderation in food prices going forward. There will be reasons given; the summer crop is over, the winter crop, less dependent on rains, is forthcoming, etc. Don't buy the spin, rather, don't be deceived by the googly. Food prices will moderate because, at least for a year or so, no major state elections are scheduled.
This is all conjecture, of course, but all forecasts are educated guesses. Policy makers, like the RBI, have to attempt to achieve a high signal to noise ratio. There are two important signals for it to consider. First, GDP growth is reverting back to its new trend growth of around 9 per cent per annum, a trend consistent with an investment rate close to 40 per cent of GDP. The fact that the investment rate has increased by 15 percentage points (from 24 per cent of GDP during 1980-2002 to 39 per cent of GDP today) is entirely consistent with a structural increase in GDP growth of 2.5 to 3 per cent per annum; hence, the new trend of 9 per cent GDP growth versus 6 per cent before.
The second signal pertains to inflation. For close to two decades now, inflation in India is determined more by international inflation than any other factor. And the signal here is that world inflation, like growth, is also going to revert back to pre-crisis levels. For India, that means inflation around 4 per cent, plus/minus 1 per cent. Thanks to the crisis, real interest rates have come to less abnormal levels, and should trend downwards over the next few years. The noise might dictate the beginning of a tightening. But not the signals. Happy Diwali.
The author is Chairman of Oxus Investments and anchor of Tough Talk, a talk show on NDTV Profit.