V Ananta Nageswaran on the IMF’s Medium-Term Forecasts for India and China

If you are an undergrad or post-grad student in India studying economics, you’ve no doubt been taught how to think about GDP (ways to measure it, ways to define it, its limitations, its advantages). But if you ask me, what we fail to do enough of is explain to students how one is supposed to use these concepts.

I often tell my students that GDP for a nation is like grades/marks obtained by a student. In much the same way that grades are not an accurate reflection of all of what a student has done in an academic year (even in purely an academic sense), GDP isn’t an accurate reflection of what a country has earned in a given time period. But also in much the same way that we have not been able to come up with a better way to assess students, we have not been able to come up with a better way to measure the economic output of a nation.

So while keeping in mind the fact that the measure isn’t perfect, but also that there isn’t a better measure in place just yet, let’s go ahead and read V Ananta Nageswaran’s excellent column in the Livemint about India and China’s medium term forecasts by the IMF.

What I am going to do below is highlight some sentences from this column and pose questions on the basis of these excerpts. Try and answer these questions, especially if you have been taught macro in your college/university. To my mind, this will go a very long way towards helping you understand if you have, well, understood key macroeconomic concepts:

  1. The International Monetary Fund (IMF) publishes its World Economic Outlook (WEO) twice a year after its Spring and Autumn meetings.

    Have you read the latest edition? If nothing else, take a look at the executive summary.
  2. “However, since then, many private-sector economists have upgraded their forecast for India’s economic growth this financial year to more than 10%, based on more recent and real-time indicators including mobility data.”

    What might a list of such indicators look like? Here’s a place to get started.
  3. “In October, India’s nominal GDP for 2026-27 was projected at ₹392.84 trillion and $4.393 trillion. In the April WEO edition, the corresponding forecasts were ₹389.01 trillion and $4.534 trillion. So, secondary-school arithmetic will tell us that the Fund has become relatively more pessimistic on the Indian rupee versus US dollar (USD) in October than in April. From 70.9 in 2020-21, the Fund sees the rupee depreciating to 89.4 against the US dollar by 2026-27. In April, the implied exchange rate forecast for 2026-27 was 85.8. So, the US dollar is stronger by 4.2% at the end of 2026-27 as per the October 2021 forecast versus April’s. The effect is that India’s nominal GDP in USD terms in 2026-27 is $140 billion lower than the April forecast.”

    Can you go back to the report and find out how the author reached these numbers? Do you agree with his calculations? Can you explain these calculations to somebody else? Do you find yourself able to write paragraphs like these? If not, what do you think you need to learn?
  4. “When it comes to forecasting exchange rates, the literature informs us that economic fundamentals do a poor job for any horizon under three years.”

    What might this mean in terms of statistical concepts? What does this tell you about how to think about long term investing (in financial assets, people and entire nations)?
  5. “Of all the economic fundamentals that influence exchange rates, the one enduring factor is the inflation differential.”

    Which are the other economic fundamentals that influence exchange rates? What is the inflation differential? Why does the author say that this particular factor is an enduring one?
  6. This is a truly remarkable graph, and worthy of thinking about deeply. Why does it look the way it does? Is this a good thing or a bad thing? For whom, exactly, and over what time horizon?
  7. “So, for any USD-INR forecast, higher inflation rates in India over the US that have been the default factor for the past few decades cannot form the basis. The Fund may have to revisit its implicit forecasts for USD-INR in April 2022.”

    Do you agree with the author’s assessment that inflation in India may not necessarily be higher than in the United States? Why or why not? With what implications beyond GDP calculations?

I’d recommend that you try and figure out the answers to these questions yourself, or even better, with a group of like-minded people. Run them past your prof(s), and see what they have to say. Wwrite up/record your answers and put ’em up for public consumption.

And best of all, try to come up with more such questions yourselves!