India's GDP Growth: Forecasts Amid Complexity

DIPAK KURMI

The National Statistical Office’s (NSO) recent projection of 6.4% GDP growth for the fiscal year has triggered a wave of analysis, speculation, and conjecture. As this estimate forms the foundation for subsequent forecasts, including the crucial budgetary projections for the upcoming fiscal year, it becomes essential to dissect the methodology, implications, and potential deviations of these numbers.

The current GDP growth estimate, though lower than the 8% average recorded over the last three years, was anticipated. Both the government and the Reserve Bank of India (RBI) had previously adjusted their expectations to align with a subdued growth trajectory, setting targets of 6.5-7% and 6.6%, respectively. Thus, the NSO’s forecast does not signal a surprise but rather a continuation of moderated economic expansion within an anticipated range.

The Basis and Limitations of the First Advance Estimate

The NSO’s first advance estimate, pivotal for budgetary planning, relies on extrapolations based on partial data—spanning the first half of the fiscal year or eight months for key variables. While this is a refinement over earlier forecasts that had little data to leverage, it remains an approximation rather than a definitive measurement. The extrapolation assumes steady trends and incorporates historical patterns to estimate performance.

This fiscal year presented unique challenges, notably the general elections, which temporarily restrained government spending and subsequently influenced private sector investments. Such anomalies add complexity to forecasting and highlight the limitations of using advance estimates as conclusive indicators. Nevertheless, these projections remain indispensable for crafting fiscal policies and determining budgetary priorities.

The downward revision of nominal GDP estimates by approximately ?2 lakh crore from initial projections underscores the iterative nature of economic forecasting. These adjustments are consequential, as they influence fiscal ratios, tax revenue expectations, and broader economic planning for subsequent years. For FY26, GDP growth is preliminarily anticipated at around 10.5%, demonstrating the domino effect of current projections on future fiscal frameworks.

The Reliability of NSO Estimates: A Retrospective Analysis

An analysis of GDP growth forecasts across four key stages—first advance estimates, second advance estimates, provisional estimates, and final estimates—reveals significant variations. This evolution reflects the gradual replacement of assumptions with actual data, resulting in periodic revisions. For example, during the demonetisation year of 2016-17, the GDP growth estimate of 7.1% across three initial forecasts ultimately surged to 8.3% in the final reckoning.

In the past seven years, final GDP growth figures have surpassed the first advance estimates in four instances, including during the pandemic year of 2020-21. On two occasions, the final numbers were lower, while they aligned perfectly with initial projections for 2022-23. This lack of a consistent directional trend underscores the inherent unpredictability of economic dynamics, driven by sectoral revisions and emerging data.

Even provisional estimates, released in May, fail to provide absolute certainty, as subsequent data assimilation continues to refine the numbers. Over the last four years, provisional estimates outperformed first advance estimates in three cases, highlighting the tentative nature of early forecasts.

Challenges in Capturing Economic Realities

India’s vast unorganised sector presents a significant hurdle in achieving precision in GDP estimates. Data from this segment is not readily available, necessitating imputations and assumptions that introduce an element of variability. However, the formalisation of the economy, facilitated by the Goods and Services Tax (GST) and increased MSME registrations, has enhanced data availability. Similarly, financial disclosures by MSMEs through institutional borrowings provide additional insights into their contributions to GDP.

Despite these advances, the gaps in data collection and the evolving nature of the economy complicate the task of producing definitive growth estimates. This inherent complexity must temper expectations regarding the reliability of early forecasts.

The Ripple Effect of Forecast Revisions

Following the NSO’s release of the first advance estimate, several institutions and analysts have revised their forecasts downward. This “follower” reaction, though predictable, raises questions about the underlying rationale. Given that the economic environment until January was largely understood, these revisions may reflect caution rather than substantive changes in outlook.

The forthcoming second advance estimates in February will be closely scrutinized for updates on the state of the economy. However, history suggests that these revisions, while important, are not definitive indicators of final GDP performance.

Drawing firm conclusions from the NSO’s first advance estimates requires caution. While these projections serve as critical inputs for policy and budgetary planning, their reliance on partial data and extrapolations limits their accuracy. Historical trends demonstrate the variability of early forecasts, driven by the incorporation of new data and sectoral revisions.

India’s economy, characterized by its size, complexity, and evolving data infrastructure, defies simplistic forecasting. While significant progress has been made in formalizing economic activity and improving data transparency, the challenges of capturing the full spectrum of economic output persist.

As the narrative around GDP growth unfolds with each successive estimate, policymakers and stakeholders must navigate the uncertainties inherent in economic forecasting, balancing immediate needs with long-term aspirations. The path to understanding India’s GDP growth trajectory requires an appreciation of both the precision and limitations of current methodologies. Policymakers must employ these estimates as guiding tools rather than definitive measures, fostering strategies that accommodate deviations and adapt to new data.

Future outlooks must also account for structural reforms and their economic impacts, global headwinds such as geopolitical tensions and trade disruptions, and domestic challenges like inflationary pressures and employment growth. As India progresses toward greater formalization and transparency in economic activities, these factors will likely reduce forecast variability, albeit gradually.

Stakeholders, including businesses, investors, and citizens, must remain cognizant of the iterative nature of GDP estimates. These figures, while critical for understanding economic health and shaping fiscal policy, should be contextualized within the broader spectrum of India’s dynamic and diverse economic landscape.

Ultimately, the labyrinth of economic forecasts demands a balanced approach—valuing their insights while recognizing their constraints. By fostering a culture of data-driven decision-making that integrates flexibility and prudence, India can better navigate its growth journey, ensuring that economic aspirations are not only forecasted but also realized.

(the writer can be reached at dipakkurmiglpltd@gmail.com)