Emboldened by the lack of any questioning by the experts (including those in government, the media, this newspaper!) of my conclusion that there was a Rs. 112,000 gap in government expenditures and reality

(with so called expenditures being obviously more - see Missing in Deficits: Money and Stimulus, Business Standard, Feb. 21, 2009), I hereby offer another seemingly off the wall conclusion - GDP growth in 2008/9, for which firm data are available for 9 months, and indirect evidence for 11 months, is likely to be significantly below 5 percent, and closer to 4 percent. Yes, no typos there. Yes, I realize that the CSO just two weeks ago and having considerably more data than the rest of us, came out with a forecast of 7.1 percent. Yes, I am aware that the Congress government, steeped in its own cluelessness, just came out with a budget stating that the economy did not need any additional stimulus because "we had provided so much already". Yes, I am aware that the gatekeepers of the Indian economy, the RBI, just announced a fortnight ago that they were mightily pleased that analysts were crediting them with the stimulus of the fastest rate cuts in the world.

Yes, I am also aware that all the experts at the investment banks (and the media via a laudatory and tendentious New York Times article as to how the RBI had saved India from a crisis -mistake to another look the growth rate is 7.1 percent so what are you complaining about) are claiming that GDP growth for 2008/9 will come in at around 6.5 percent. For the next year, they boldly forecast a lower growth rate of around 5 percent. I want to believe the experts. And maybe they will be right. But only because GDP growth next year is likely to be higher than 2008/9! [There is an equal misguided error in the forecasts of government expenditures for 2009/10, especially large subsidy expenditures in food, oil and fertilizer, but that I will deal with in a subsequent article].

There are several ways of forecasting GDP growth rates, especially when more than three- fourths of the data are available. So to get it wrong, and massively wrong as I am suggesting, is to make an inexcusable albeit "misguided" mistake. Tragically, led by the front by our economic decision makers in the RBI and Ministry of Finance, the government has been more than casual and clueless about the real happenings in the economy. They have been in complete denial, wishing to concentrate on the spin needed for the next election. Mai Hoon Na is now the war cry of the Congress as it falters from one mistake to another.

There are several methods of forecasting GDP growth rates based on more than 9 months data. First a bottoms up sectoral approach. Let us start with agriculture, a sector which showed a -2.2 percent growth for the last twelve months. A point made often in the past, but one which bears repeating despite it repeatedly failing to pierce the deaf ears of experts at investment banks and the media (and the policy makers!), is that a 12 month growth rate in Oct-Dec 2008 includes the growth that took place from Jan to March 2008, a quarter that does not belong in the calculation for the fiscal year that starts in April 2008. So what is an analyst to do? She can take the nine month growth rate from April to December and approximate a growth for the quarter just ending. Simple, no? Not at all. This calculation would show horrendously high growth rates in agriculture of around 20 percent plus. This occurs because of seasonality in agricultural production. The response to this problem has been to use year on year growth rates, but as shown above, such a calculation includes growth that does not belong.

The accepted solution to this problem is to use "seasonal adjustments". Since RBI staff have written papers on this, the problem and solution is well known to them. Why they don't use it in policy formulation, or why their umpteen advisers don't tell them to do so is one of the enduring mysteries about governance failures within the government.

Seasonally adjusted and annualized (one quarter growth rate multiplied by 4) growth rates (SAA) are presented in the table for the different sectors of the economy. Agriculture (17 percent of GDP) has grown at -0.5 percent. That agricultural growth is unlikely to exceed 1 percent for the full year is also indicated by the pattern of the monsoon, which was 2 percent below normal. This pattern is associated with an average of 1 percent growth for the last thirty years. Industrial growth for the past 9 months has been only 1 percent, SAA. These two sectors (construction is within industry) account for 44 percent of the economy, and this 44 percent has grown, to date, at 0.2 percent. Services growth, to date, has averaged 7.7 percent, a steep decline from the last year growth rate of 11.2 percent.

While the government, and market, looks at the year-on-year data for GDP growth of 6.8 percent, in reality the economy has been growing at only a 4.5 percent pace (GDP factor cost data). According to GDP at market prices, the growth rate has been 1 percentage point lower, only 3.5 percent, with the growth rate in the Oct-Dec quarter at a negative 1 percent SAA. All in all, this suggests that the full GDP year growth rate will be between 4 and 5 percent.

The problem of looking at year-on-year growth rates when reality is quarter on quarter SAA is not unique to India. Recall that the Chinese year on year growth rate decelerated to 6.8 percent in the Oct-Dec quarter, a considerable slowdown from the double digit growth in the first 9 months of the year. Everybody quickly realized that this meant a zero to negative growth for the Oct-Dec quarter. Both monetary and fiscal authorities in China reacted much faster than their Indian counterparts. They were not in denial, and knew that ultimately they were accountable to the population. In India, the central government has some excuse, but not really, for being in denial and seemingly clueless. (How much in denial is indicated by the fact that they haven't even bothered to appoint a full time Finance Minister, this at the greatest economic crisis the country has faced). It is for certain that the RBI cannot hide behind any fig leaves. It needs to be made accountable for its wrong (and good) decisions. That is when it can be worthy of being called the last institution standing.

Notes: All quarter on quarter (qoq) growth rates are seasonally adjusted (Census X-12 procedure, thesame as used in the US) and annualized i.e. the qoq growth rate is multiplied by 4. This means that eachfigure in the table is comparable as an annual growth figure.