† Mihir Rakshit heads the Monetary Research Project at ICRA Ltd. He was formerly Professor at the Indian Statistical Institute, Kolkata.
In terms of this model we indicate why it is not legitimate to estimate the projected growth of agriculture, industry and services separately.
The purpose of the note is to draw attention to some problems of projecting GDP growth in countries like India and suggest an alternative approach to short-term forecasting of macro variables. In mainstream economics following Robert Solow supply-side factors like labour, capital and total factor productivity are considered the fundamentals behind economic growth. In India the Planning Commission's growth projections are based on the prospective investment ratio and incremental capital-output ratio (ICOR). Since both these approaches ignore the demand side altogether they are not very useful for short-term GDP forecasting. What is no less important, there are significant differences in the operations of agricultural and non-agricultural sectors of the Indian economy. It is therefore necessary to (a) examine the nature of interaction between the two sectors; and (b) identify the factors that can be considered drivers of growth in the short run. Keeping these requirements in view we set forth an analytical framework where supply-side factors govern agricultural output, production in industries as well as services is demand determined, and prices of farm products are market clearing. In terms of this model we (a) indicate why it is not legitimate to estimate the projected growth of agriculture, industry and services separately; (b) identify (apart from monetary policy stance and tax rates) agriculturalproduction, government consumption, investment and export demand as the main (short-term) autonomous variables; and (c) illustrate how sectoral and total GDP growth rates for the current year can be forecast on the basis of expected changes in these autonomous variables.
