Now casting GDP growth for better policy response

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Published: August 30, 2019 2:37:12 AM

The reason behind the move is that uncertainty has emerged as a key input that is being factored in while formulating policies.

GDP growth, Reserve Bank of India, CEII, GDP dynamics, key economic indicatorsUncertainty shocks have led to slowdown in investments, decline in economic activity and asset values.

In a bid to provide swift policy response to dynamic economic conditions, the Reserve Bank of India has come up with a concept of ‘Nowcasting India’s GDP Growth’. Rather than waiting for initial estimates on the GDP growth after a lag of 7-8 weeks, this model would use certain key economic indicators that would give a picture of quarterly growth even as the quarter is underway.

This process looks at key factors like consumer demand, non-oil and non-gold imports and auto sales among others to assess the state of the economy during the quarter. The reason behind the move is that uncertainty has emerged as a key input that is being factored in while formulating policies. Uncertainty shocks have led to slowdown in investments, decline in economic activity and asset values. These developments have imparted urgency to empirically capture and quantify the impact of uncertainty on the economy.

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In its annual report for FY18-19, the Reserve Bank of India said central banks globally rely on high frequency indicators for forward looking assessment of the state of the economy, as official statistics come with a lag.
In order to come up with the current estimate of GDP growth during the quarter, the central bank has created a coincident economic indicator for India using the single index dynamic factor model. This indicator is based on economic indicators that strongly correlate with the dynamics of GDP growth.

The central banks’s annual report says, “Two indices are considered – a 6-indicator CEII comprising the production of consumer goods, non-oil non-gold imports, auto sales, rail freight, air cargo, and government receipts, and a 9-indicator CEII, which additionally includes IIP-core, exports, and foreign tourist inflows.” The nowcasts are based on the 6-indicator and 9-indicator models. The nowcasts track GDP dynamics and turning points reasonably well.

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