One of the most discomforting features of present-day forecasts is that they are easy to arrive at and do not require any sophisticated tool to validate the results. If the leading indicators, namely, industrial production, order loads, housing starts, rate of inflation, unemployment rate and current account balance show signs of slowing down, GDP forecasts for the country are made to slip sharply. After a reasonable waiting period, the prediction is made for a brighter future based on an optimistic assumption of the leading indicators.

A recent estimate varies from the actual by as much as 25%. One needs to seriously look into the methodology and ascertain the veracity of the assumptions made. The forecasts for the next two years have been kept at a sufficiently high level, perhaps to compensate for the lower forecasts in the year that immediately follows.

One possible way out could be to undertake a scenario analysis, which would enable forecasters to widen the perspective of the movement of the leading indicators. Two, a periodic review, quarterly or six-monthly, seems appropriate and many leading analysts are doing it .

But if there is a significant revision of the forecasts within a short period, the question remains: why did they fail to predict even the emerging threats for these indicators and build them into the basic framework of the model? If this could have been done by inducting more sophistication into model building, the countries concerned could have been jerked out of a state of complacency. In fact, they would have undertaken preventive steps to correct the course of the various macro variables that subsequently create immense hardship for people.

The latest IMF outlook report is not a departure from this trend. For the current year, it has brought down GDP estimates for India from the earlier 5.6 %( July 13) to 3.8%. This is against the government?s estimates of 5-5.5% for the 2013 fiscal. It is quite possible that IMF?s assessment of the Indian economy would be utilised by rating agencies to downgrade the country?s credit evaluation, and that would surely impinge on further FDI inflows to India. The first-quarter CAD in Fy14, at $50.3 billion, exceeds the previous year?s figure by $7 billion.

Thanks to a sharp decline in rupee rates, the oil import bill for Q1 is marginally higher than that in the previous year although the gold import bill exceeds last year?s level by around $7 billion. It is likely that gold imports would come down after some timely steps taken by the government. It is interesting to note that non-oil, non-gold imports are lower by $3.7 billion in the first quarter. It needs to be monitored if essential imports also have to be curtailed as that would directly hurt some critical industrial segments such as manufacturing, including exporting units, which are import-dependent. If CAD improves further to reach the level of 3.5-3.8% of the GDP with the exchange rate at R60-61 per dollar, headline inflation at 6-6.5% and industrial production in HI of 2013-14 at 3-4%, it would surely create a safe ground for IMF to revise up its 2013 forecast for India.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal