With publicly available data and sophisticated forecasting models, it is hard to fathom why the IMF was so upbeat about India exactly a year ago
By Rupa Subramanya
Almost exactly a year ago, the newly appointed chief economist of the International Monetary Fund (IMF), Indian-born Gita Gopinath, was bullish on the Indian economy. The IMF, in its World Economic Outlook in January 2019, projected a growth rate of a very healthy 7.5% for 2019, and an even better 7.7% for 2020. Gopinath went on to say that the Indian economy is healthy. A year later, the IMF, and Gopinath have changed their tune. India’s projected growth for the current fiscal year was downgraded sharply to 4.8%, and 5.8% is predicted for FY21. The drop is so dramatic that Gopinath has said that 80% of the projected 1% reduction in the IMF’s forecast for global growth is attributable to India.
In explaining the downgrading of India’s expected growth, Gopinath pointed to the crisis in the financial sector, especially non-bank financial companies, and worsening business sentiment. The real puzzle is why these specific warning signs weren’t evident to Gopinath and the IMF a year earlier, when it was abundantly clear to all credible and non-partisan observers that the Indian economy was heading into trouble.
As early as the fall of 2018, there were warnings about a looming crisis in India’s shadow banking sector in major domestic and international publications. How could Gopinath and the IMF possibly certify the Indian economy as healthy in January 2019 when just a few months earlier, one of the country’s most important non-bank lenders was insolvent and threatened to bring down the whole financial system? Recall, that the looming shadow banking crisis was not in the context of a healthy financial system, but one with large stocks of non-performing assets at major banks and non-bank financial institutions.
If the IMF were a private forecasting agency, it would have been discredited and out of business by now, with all of the faulty forecasts, not just for India, but for other countries as well, it has made. As Vivek Dehejia and I have shown, the IMF tends to consistently overestimate India’s growth. But, the IMF is not a private firm, nor is it a national statistical organisation, but an international organisation that is beholden to all the countries which are its members. Despite all protestations to the contrary, the IMF, like its sister organisation, the World Bank, is intensely political, even to the extent of the nationalities of its top officials. And, like the World Bank, the IMF is dependent on national datasets provided by its member countries.
Even then, with the publicly available data and some of the smartest macroeconomists building sophisticated forecasting models, it is hard to fathom why the IMF was so upbeat about India exactly a year ago.
A cynical observer might point to the fact that India was gearing up for the general elections a year ago, and bad economic news coming out of the official institutions in Washington DC would not have been good for the incumbent government of prime minister Narendra Modi. Rather, with the IMF giving India a free pass—the January 2019 report had very scant coverage of India—and a possible war with Pakistan looming, very little public discussion about the state of the economy occurred in the lead up to the election. Now, a year later, the dust has settled and there is no particularly immediate political fallout for the government from this dose of bad economic news from the IMF.
For a government and a governing party that thrive on good public relations and marketing, it came as no surprise that they spun the recent IMF news as validating India’s importance to the global economy! The larger point is that a PR-driven government will look for external validation from organisations such as the IMF or the World Bank, rather than relying on their own internal expertise for a legitimate sense of where the economy is headed. Much like the IMF, the World Bank’s Ease of Doing Business rankings, in which India keeps moving up by leaps and bounds year after year, much to the puzzlement of those who actually do business on the ground, has been great fodder for the Modi government’s PR machine. At least, in the case of the World Bank’s Doing Business index, the methodology was skewered by their own chief economist, Paul Romer. No one at the IMF has yet had the courage to do something similar with their unrealistic growth projections.
Perhaps one reason why the government looks for external validation is the absence of internal expertise on economics. The end of Modi’s first term saw the departure of several eminent economists, whose replacements are markedly inferior intellectually but notably superior at public relations.
In effect, what one observes is an intricate dance of public relations, both by the World Bank, the IMF, and other international organisations on the one hand, and by national governments such as India on the other. With all its flaws, the previous Congress-led UPA government didn’t accord the World Bank and the IMF undue importance, as they had their own ideas and expertise on economic policy, whether right or wrong. It is ironic that a ruling dispensation which is suspicious of just about all outsiders pays undue attention to the prognostications of the World Bank and the IMF!
The ultimate loser of this dance is the average Indian, whose life prospects have considerably worsened by poor economic growth and stagnant job opportunities.
The author is Econo