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Have forecasters lost credibility?

Apr 15, 2009

The Centre for Monitoring Indian Economy (popularly known as CMIE) was established in 1976 by the eminent economist Dr. Narottam Shah. The company has grown into India's leading private sector economic research institution. However, in response to a defamatory allegation by a brokerage house that its forecasts about Indian economy and India Inc. are corrupted and with typographical errors in the text, the company had to issue the following reply."We have written this note to assure you that our computations have not 'gotten crazily mixed up', we are not on steroids, we do not use Excel for our forecasts and none of our colleagues have left to work as 'construction crane operators' as implied in the report, hopefully in jest." This just goes to show to what extent the credibility of long term forecasts (economic and financial) and forecasters (even those in the league of CMIE) is in danger of being subject to derision by the quarterly-EPS fixated brokerages, despite the former having a sound logical approach.

CMIE on its part has clarified that its projections about the profit growth of Indian companies were based on sound assumptions. According to the institution, the losses incurred by the petroleum products sector had eaten away 53% of the aggregate profits made by the rest of the India Inc. during 9mFY09. Hence, estimating the benefits from the fall in the crude oil prices, CMIE expected the petroleum companies to clock net profits of Rs 110 bn in FY10 as against the net losses of Rs 565 bn estimated for FY09.

Excluding the energy sector, CMIE expects the rest of listed Indian corporates to report a 23% YoY rise in profits in FY10. Healthy order-book positions of capital goods companies, comfortable capital positions (CAR) in banks, softening of interest rates and fall in commodity prices are also some of the other reasons cited by the research agency for its forecasts.

While not commenting on the specific forecasts of CMIE, what we can definitely conclude is that the agency's projections being long term in nature are certainly based on sound logic and well-thought out assumptions rather than being speculative in nature. The agency's response to the allegations seem therefore befitting.

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