Why are economic forecasts so consistently optimistic? Why, on reading the bombshell report that India’s GDP growth fell to 5% in the last quarter, the fifth consecutive quarter of sequentially falling growth, did none of the forecasting agencies put out a note saying conditions are likely to get even worse? Without exception, they see the slowdown as a blip that will pass, and have their eyes set on the 8% growth that we think is India’s by right, though it has rarely been touched in the past decade.
With each unexpected fall, ratings agencies recalibrate their charts, setting a new course to the same wished-for destination. There’s always an excuse for things not working out: one year, it is the effect of demonetisation, another, it is the Goods and Services Tax rollout, a third it is the shadow banking crisis, and so on. At what point will they begin to consider the blips not as blips, but a pattern of mismanagement that is likely to continue, because the ruling party is incompetent and has no clue what good economic policies look like?
Consider the agency Fitch Solutions. I’ve settled on it arbitrarily, others have been as bad at their forecasts. Its response to the latest disastrous GDP reading was, “We at Fitch Solutions believe that growth has likely bottomed out and will start to rebound over the coming quarters.” That’s the tale it’s been telling for a long time. A year ago, Fitch estimated India’s growth in the financial year ending March 31, 2019, would be 7.8%. By December, it cut that to 7.2%, citing “higher financing cost and reduced credit availability”. The final figure landed at 6.8%.
Cutting projections
Taking 6.8% to be the bottom, Fitch forecast a slightly healthier growth rate for the current year, at 7 %, increasing to 7.1% the following year. In March, it cut that projection to 6.8%, and in June dropped it further to 6.6%, before shifting to a 6.4% forecast after last week’s figures, a rosier view than Moody’s, which now projects 6.2%.
Fitch is far from alone in being consistently optimistic and consistently wrong. The International Monetary Fund’s projections following the global meltdown, which it failed to predict, overestimated the world’s growth trajectory in each of the following years. But none of these past errors should be taken to mean its current forecast is necessarily misguided. Maybe the ratings agencies are correct that this is just a common, garden variety slowdown caused by a bunch of one-time blows to the economy.
But what if it’s more serious? What if it goes beyond something that can be ameliorated by merging a few banks, tinkering with GST rates, and commandeering a bigger slice of the Reserve Bank of India’s surplus?
The Modi government has produced no fundamental changes to stimulate long-term growth, aside from ones it inherited from the previous regime such as the Goods and Services Tax. There is no word on reforming labour laws or making it easier for farmers to sell land (which is very different from making it easier for the government to expropriate land from farmers). Without resolving such serious bottlenecks, it is highly unlikely the government will hit its target of making India a $5 trillion economy by 2024.
Indians are not only buying fewer biscuits and less underwear, but also fewer air tickets and Mercedes Benz vehicles. The slowdown is evident across economic classes and across sectors of the economy. When car sales fall by 30% from one year to the next, it does not signal a common or garden variety slowdown. Those are shocking figures, which will have severe knock-on effects on industries like steel manufacture.
The textile industry, a sector in which India ought to be a world leader given its over two thousand year history of exporting cotton fabrics, is losing out to competition from Vietnam, Indonesia, Bangladesh and Sri Lanka, and failing, in the process, to pick up market share from China. Far from flourishing in global trade, it finds itself beleaguered at home. This is not something that a drop in interest rates will come close to addressing.
A new Cold War
Meanwhile, the geopolitical situation is hardly likely to improve while a capricious lunatic sits in the White House. The worst-case scenario for the global economy was articulated last month by Nouriel Roubini, who spoke of a Cold War rivalry between the United States and China that goes beyond a trade war and leads to a medium term process of decoupling of supply chains and de-globalisation.
What seems remarkable to me, given all the negative data, is the complacence of India’s government. Narendra Modi and his ministers are like the officers in a scene from Monty Python’s The Meaning of Life. A man named Perkins has had his leg bitten off at night, for which he blames a hole in the bed net that allowed mosquitoes to get through. A doctor is summoned, who says, “Well, let’s have a look at this one leg of yours, then, eh? Yes… Yes, well, this is nothing to worry about… keep warm, plenty of rest, and if you’re playing football or anything, try and favour the other leg… be as right as rain in a couple of days.”
The Indian economy will not be as right as rain anytime soon.