Tuesday, August 19, 2008

Optimism in the GDP forecast for 2008-09

CMIE has come out with their Monthly Review for August 2008 in which they give the rationale for their particularly optimistic forecast for GDP growth in 2008-09. One key element of their optimism is strong investment activity which (a) buoys demand and (b) generates fresh output through projects that will be commissioned in 2008-09. At page 62 they say that projects worth Rs.270,000 crore are likely to be commissioned in the remainder of this year.

The other key element of their optimism is measurement problems of the Index of Industrial Production (IIP). On page 45, they have a quarterly time-series where they compare quarterly sales growth (built bottom-up from firm level data) vs. the IIP. For the June 2008 quarter, there is an unprecedently large discrepency between the two: firm level data is saying 23.3% growth in real terms (a rollicking pace of growth) while IIP data is showing 5.6% growth. They say:

It is imperative that the credibility of the IIP is reestablished at the earliest to enable meaningful analysis. The recent fall in the reliability of the IIP is the result of a considerable deterioration in the quality of data used in the construction of the index. Response rates have fallen dramatically. This has compounded the usual problems of the IIP - archaic weights and methodology.

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