Should Infosys ‘guide’ RBI?
Rohit Joshi/Zee Research Group
There is apparently nothing common between Infosys, India’s pioneering company in IT domain and the Reserve Bank of India (RBI), the nation’s central bank. But a closer look shows that of late both have shown remarkable capability in missing targets forecast by them though with contrasting results.
While Infosys, which pioneered the practice of offering guidance, abandoned the idea for the coming quarter post its failure to meet guidance for two consecutive quarters, the central bank merrily continues to make forecasts, most often wrongly.
Not just RBI, key government bodies including the Planning Commission, failed to meet their guidance, but persist with the practice of forecasting key economic performance data for the country. Worse, even the Central Statistical Organization (CSO) too does not cover itself under any glory when it comes to correctly predicting the country’s macro economic health.
During the last financial year (2011-12), owing to the adverse international environment and weak industrial activity at home, RBI scaled down the growth projections twice and finally forecast a 7 percent GDP (gross domestic product) growth rate in the third quarter review of January 2012.
However, it came as a dampener when India’s GDP growth fell to a nine year low of 6.5 percent in 2011-12, which was way below RBI’s projections. Furthermore, the actual data was also nowhere near to the Central Statistical Organization (CSO) estimate of 6.9 percent.
Montek Singh Ahluwalia, deputy chairman, Planning Commission too erred. He had predicted economic growth may slide to 7 percent during 2011-12. Prime Minister`s Economic Advisory Council (PMEAC) Chairman, C Rangarajan, said it would be above 7 percent. Even the erstwhile Finance Minister, Pranab Mukherjee, himself projected a growth rate of 7 percent plus for the last fiscal. However, the final figure of 6.5 percent proved that they all have missed the bull’s eye.
Infosys, in contrast, discontinued the practice for the upcoming quarter, as the company saw signs of credibility gap. It missed guidance for the second consecutive quarter. Last fiscal too the company missed its lowered full year guidance. Credibility of guidance (whatever little was remaining) has been shattered with multiple cuts; revised one is at-least 5 percent growth in dollar revenue for full year (2012-13).
Is the fault line with issuing of guidance or are we in a perpetual season of missed targets? As far as macro economy data is concerned, economists are clearly on the defensive. Sumita Kale, Chief Economist at Indicus Analytics, said, “Indian economy data is not robust enough to make for strong modelling at the best of times. In the current scenario, where there are so many probabilistic outcomes, estimation is even more challenging.”
Madan Sabnavis, Chief Economist, CARE Ratings, is forthright. “Growth predictions are required but they should be pragmatic. Organizations should not just forecast good numbers merely for the sake of giving it. The figures should be realistic.”
The ground situation does not suggest so. The central bank recently lowered the growth projection for 2012-13 to 6.5 percent from 7.3 percent earlier in the wake of deficient monsoon and global economic problems. The Planning Commission, however, has a different take: the deficient monsoon is likely to pull down the economic growth in the current financial year to about 6 percent from 6.5 percent a year ago.
Sharing his thought on the two utterly different figures of RBI and Planning commission, Sabnavis at CARE, averred, “There is a huge gap between the two figures which seem to create confusion in the markets. In general, maximum 2-3 government organizations should predict these numbers. It’s really absurd to know that six to seven government entities are coming up with different numbers.”
However, Kale at Indicus has a different perspective and opined, “Although there appears no synchronization amongst the various government entities yet multiple views give a better understanding of perception and expectations, rather than restricting it to just two.”
Or the way out is to just not forecast, especially in turbulent times given the magnitude of variables? Accordingly, should RBI follow the footsteps of Infosys? Kale at Indicus shuns the idea: “Infosys and RBI can’t be compared. The central bank of a country has to give some guidance regarding the economy growth, irrespective of the level of uncertainty prevailing in the environment.”
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