RBI’s Growth Projections: How Often Have They Been Off-The-Mark? 

The Reserve Bank of India has cut its GDP growth projection for 2019-20 five times now. It’s first projection, made in February, stood at 7.4 percent. In its latest monetary policy review, on Thursday, the committee reduced the projection to 5 percent.

The series of cuts have prompted questions about the central bank’s ability to forecast growth accurately. But has the central bank gone wrong only this year, when the economy in shrouded in uncertainty or has its projections been off-the-mark consistently?

Data collated by BloombergQuint shows that in at least five out of the last eleven financial years, the central bank’s original growth projection, made at the time of the annual policy in April, has been off-the mark by more than 1 percentage point. In other years, while there have misses, the gap between projected growth rate and actual growth rate has been smaller.

For the current financial year, since actual full year growth is not yet available, BloombergQuint has taken the RBI’s latest projection. Projections and actuals from FY16 to FY18 are for gross value added growth since in those years the RBI did not provide a GDP growth projection.

The data shows that the central bank’s projections diverge from the actual outcome in years when the economy is undergoing transition.

For instance, in 2009-10, growth rebounded far quicker than the central bank had anticipated in the aftermath of the global financial crisis. There was a justifiable reason for this as the government provided significant fiscal support.

In 2014-15, once again while the projections were for a weak year of growth, the economy picked up steam following a strong election verdict which spurred investment.

This year, in 2019-20, the economic weakness has become steadily more pronounced due to the log-jam in the financial sector and weak demand conditions in the urban and rural economy.

In a sharper than expected fall in growth, the miss is inevitable even for the central bank, said Suvodeep Rakshit, senior economist at Kotak Institutional Equities. Giving an instance, he said that high frequency data for consumption and labour markets is not easily available in India. As such, the RBI too has to rely on extrapolations from high frequency indicators such as auto sales which may only reflect the urban economy.

Rakshit added that the central bank was not alone in it’s optimism over GDP growth in FY20. The central bank also relies on the same data that private forecasters use, most of which is publicly available, he said.

While some like Credit Suisse Nomura, Kotak and Morgan Stanley did foresee a slowdown, the extent of the slowdown has surprised most.

Rajni Thakur, economist at RBL Bank said that growth has been tough to predict this year due to a series of unforeseen events.

“What started off as a credit event when IL&FS defaulted, became a sector-wide NBFC issue. When weak sentiment spreads, it is harder to project the impact. This is the reason it is harder to say when we are likely to see a reversal in sentiment and the demand-led slowdown,” Thakur said.