An optimism bias in forecasts

by Manasi Swamy

The Reserve Bank of India (RBI), in its third monetary policy review for 2021-22, kept its growth forecast for the fiscal year unchanged at 9.5 per cent. Its outlook on the economy’s quarterly performance, however, underwent substantial revisions.

The RBI made sharp downward revisions in its growth projections for the last three quarters of 2021-22. But, it revised the estimate for the first quarter substantially, by 290 basis points, from 18.5 per cent earlier to 21.4 per cent. It brought down the growth forecast for the September 2021 quarter by 60 basis points to 7.3 per cent. It shaved off its projection for the December 2021 quarter by an even steeper 90 basis points to 6.3 per cent and for the March 2022 quarter by 50 basis points to 6.1 per cent.

A panel of 35 professional forecasters surveyed by the RBI during July 12-30, 2021, lowered their growth outlook for India’s real GDP in 2021-22 to 9.2 per cent from 9.8 per cent projected earlier during May 12-26, 2021. Unlike the RBI, they lowered their forecast across all quarters. Median growth estimate for the first quarter was cut to 19 per cent from 20.1 per cent, for the second quarter to 8 per cent from 8.2 per cent and for the third quarter to 5.8 per cent from 5.9 per cent. The downward revision in growth projection was a little steeper for the last quarter, to 5.3 per cent from 5.9 per cent.

At the beginning of the year, both the RBI and professional forecasters, were optimistic about the Indian economy clocking double-digit growth in 2021-22. In April 2021, the RBI had pegged GDP growth for 2021-22 at 10.5 per cent, while the median projection of professional forecasters was a shade higher at 11 per cent. They brought down the forecasts subsequently to their current levels of 9.5 per cent and 9.2 per cent, respectively. International Monetary Fund (IMF) and the World Bank (WB), in April 2021, were also optimistic about India achieving double-digit growth of 12.5 per cent and 10.1 per cent, respectively. They too revised their projections downwards later. The World Bank cut its growth forecast to 8.3 per cent in June 2021 and the IMF scaled down its forecast to 9.5 per cent in July 2021. We believe that these projections will be revised further downwards as the year progresses.

There has been an optimism bias in forecasts ever since the Indian economy started slowing down.

At the beginning of the fiscal, the RBI had projected real GDP growth for 2017-18 and for 2018-19 at 7.4 per cent each. Median projection of the panel of professional forecasters was in the range of 7.3 to 7.4 per cent for the two years. The IMF and the World Bank were equally optimistic on the Indian economy’s performance with growth projections in the range of 7.2 to 7.4 per cent. We had pegged the growth for both the years at 6.9 per cent at their beginning. But the actual growth turned out to be even lower at 6.8 per cent for 2017-18 and 6.5 per cent for 2018-19.

In April 2019, the RBI and professional forecasters pegged GDP growth for 2019-20 at 7.2 per cent and 7.3 per cent, respectively. The IMF projected a 7.3 per cent growth in India’s real GDP for the year. The World Bank’s growth projection was even higher at 7.5 per cent. CMIE once again was at the lower-end of the growth projection band, with a forecast of seven per cent real GDP growth for 2019-20. The actual growth during the year undershot everyone’s expectations and by huge margins. Real GDP grew by only 4 per cent during the year.

The RBI did not release GDP projection for the pandemic-hit 2021-20 at the beginning of the fiscal. Professional forecasters pegged the growth at 5.5 per cent, which they subsequently brough down to a fall of 1.5 per cent in June 2020 and further down to a fall of 5.8 per cent in August 2020. The international agencies IMF and World Bank begun the year with growth projection of 1.9 per cent each, which they subsequently revised to a contraction of 4.5 per cent and 3.2 per cent, respectively, in June 2020.

CMIE was the odd one in the pack when we projected a flat real GDP, in other words no growth, for 2020-21 in April 2020, and also when we trimmed the forecast down to a six per cent contraction in May 2020. The actual GDP contraction in 2020-21 turned out to be even steeper at 7.3 per cent.

We believe that this year the Indian economy would grow by only 7.1 per cent. Our projection is lower than the growth projected by the RBI and the median projection of professional forecasters. The RBI expects real GDP to grow y-o-y by 6.2 per cent in the second half of 2021-22. The median growth projection of professional forecasters for second half of 2021-22 is also higher than ours at 5.6 per cent. In our opinion, the economy at best would be able to clock 2.5 to 3 per cent growth in the second half on top of last year’s pent-up demand.

It is important that the inherent optimism bias of the RBI, multilateral agencies and professional growth forecasters who predominantly belong to the financial markets is recognized by investors and enterprises to avoid possible mis-allocation of resources.

Real GDP Growth Forecast (%)
Month of forecast Forecaster 2017-18 2018-19 2019-20 2020-21 2021-22
April CMIE 6.9 6.9 7.0 0.1 9.2
SPF 7.4 7.3 7.3 5.5 11.0
RBI 7.4 7.4 7.2   10.5
WB 7.2 7.3 7.5 1.9 10.1
IMF 7.2 7.4 7.3 1.9 12.5
June CMIE 7.2 7.0 6.8 -6.0 7.2
SPF 7.4 7.4 7.2 -1.5 9.8
RBI 7.3 7.4 7.0   9.5
WB 7.2 7.3 7.5 -3.2 8.3
IMF 7.2 7.4 7.3 -4.5 12.5
August CMIE 7.2 7.0 6.8 -6.0 7.2
SPF 7.4 7.4 6.9 -5.8 9.2
RBI 7.3 7.4 6.9   9.5
WB 7.2 7.3 7.5 -3.2 8.3
IMF 7.2 7.3 7.0 -4.5 9.5
Actual CSO 6.8 6.5 4.0 -7.3  
Note: SPF is median of Survey of Professional Forecasters results

CMIE STATISTICS
Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.1 -0.7
Consumer Sentiments Index
Base September-December 2015
58.2 0.0
Consumer Expectations Index
Base September-December 2015
60.1 0.0
Current Economic Conditions Index
Base September-December 2015
55.2 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Sep 20 Dec 20 Mar 21 Jun 21
New projects 2.53 1.42 2.13 2.74
Completed projects 0.77 0.86 1.15 0.71
Stalled projects 0.08 0.31 0.26 0.32
Revived projects 0.27 0.15 0.22 0.12
Implementation stalled projects 0.09 0.20 0.32 0.25
Updated on: 26 Sep 2021 3:28PM
Quarterly Financials of Listed Companies
(% change) Sep 20 Dec 20 Mar 21 Jun 21
All listed Companies
 Income -6.3 1.6 14.8 42.0
 Expenses -10.3 0.1 7.3 42.2
 Net profit 47.9 58.3 325.4 124.7
 PAT margin (%) 8.4 8.4 8.9 9.0
 Count of Cos. 4,430 4,450 4,355 4,324
Non-financial Companies
 Income -10.5 0.2 17.5 60.8
 Expenses -14.2 -0.8 10.4 62.9
 Net profit 31.8 54.7 232.8 178.2
 PAT margin (%) 8.1 8.8 9.0 8.4
 Net fixed assets 5.9 2.3
 Current assets 0.8 4.6
 Current liabilities -1.8 0.8
 Borrowings 8.5 -4.2
 Reserves & surplus 3.7 12.0
 Count of Cos. 3,282 3,304 3,251 3,239
Numbers are net of P&E
Updated on: 26 Sep 2021 3:28PM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.3 0.2 -1.4
 Expenses 13.6 0.2 -3.7
 Net profit 15.2 -10.4 39.8
 PAT margin (%) 2.1 2.1 7.7
 Assets 9.8 8.5 13.4
 Net worth 8.5 4.4 15.1
 RONW (%) 3.8 3.5 9.5
 Count of Cos. 31,749 30,612 4,154
Non-financial Companies
 Income 14.0 -1.7 -3.9
 Expenses 14.2 -1.4 -5.6
 Net profit 21.4 -21.1 25.5
 PAT margin (%) 2.9 2.4 7.3
 Net fixed assets 5.6 10.0 3.6
 Net worth 7.9 2.1 13.3
 RONW (%) 6.4 4.9 10.7
 Debt / Equity (times) 1.0 1.1 0.6
 Interest cover (times) 2.3 2.0 4.3
 Net working capital cycle (days) 74 81 64
 Count of Cos. 25,424 24,480 3,033
Numbers are net of P&E
Updated on: 20 Sep 2021 8:43AM