Expected inflation and forecast of growth rate in India

Abstract

Under rapidly changing economic environment in India, economic decision makers at various levels are likely to consider reliable short term forecast of the growth rate of the economy as an important input. It is argued that a simple model with a few variables is likely to be more relevant and reliable for the purpose than elaborate complicated models with hundreds of equations and variables. Expected inflation rate and internal supply-shock are hypothesized to be crucial variables. Numerous alternative methods are tried to measure the expected inflation in India and final choice is made on the bases of certain criteria discussed in the paper. The growth forecasting performance of the model suggested in the paper is compared to the official estimates for the last two years The exploratory exercise carried out in the paper shows promise and potential.