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Why Montek gets forecasting wrong?
Fri, 22 Feb Pre-Open

The Indian economy grew 5.3% from a year earlier in the July-September period, below the 5.5 % posted for the three months ending in June. India is battling weak consumer demand in overseas and domestic markets. The rupee remains weak and the trade deficit the widest ever after merchandise exports, which make up about 10% of GDP, fell for six straight months.

The deputy chairman of the planning commission of India, Montek Singh Ahluwalia has said that the Indian economy could grow at anywhere between 5-5.5% during this financial year (the year ending on 31 March 2013). This is way off the 7% growth he was talking about some time back. And once again he is expecting a better economic growth rate in the second half of current fiscal. He has said GDP expansion is likely to improve to 8% in the next two to three years from below 6% at the moment.

This leads us to wonder whether he has any idea of which way the economy is headed. Forecasting is a difficult business. Only people close to the activity are best placed to forecast it. Nassim Nicholas Taleb (the author of the famous book 'Black Swan') has said that people get forecasts wrong all the time because they are typically victims of the "turkey problem'. The butcher will keep feeding the turkey until a few days before thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief.

The same is applicable here. When Mr. Ahluwalia insisted in late April 2012 that the economy will at least grow at 7% he was being a turkey. He was confident that the good days will continue, and was not taking into account the fact that things could go really bad. This is because expecting a trend to continue is a typical tendency seen among people who work within the domain of finance and economics.

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