Forecasting India’s Long-Run GDP with High-Dimensional Data

By Sunil Sonkar 3 Min Read
3 Min Read
Forecasting India's Long-Run GDP with High-Dimensional Data

Many experts believe India may walk on the path of economic growth even though there the country is gradually coming out of various challenges including the global financial crisis and the COVID-19 pandemic. However, it cannot be turned into oblivion that India faced significant problems such as a crisis in the financial sector, rising fuel prices, and high unemployment rates even before the pandemic. The government’s ability to use fiscal and monetary policies to address these issues then was limited due to low interest rates and high budget deficits. Over the time, the government has implemented various fiscal and reform measures.

After the lockdown restrictions were lifted, scholars and policymakers attempted to predict India’s long-term economic recovery. In one study (Maiti et al. 2023), big data was used to argue that India’s economy is unlikely to grow beyond 5% in a business-as-usual scenario. Factors beyond the economy’s control will determine how much it can accelerate.

Predicting long-term economic growth is challenging due to lack of a robust methodology and the need to account for external shocks and policy variables. Traditional methods, such as auto-regressive models, rely on a limited number of variables, potentially missing crucial information. High-dimensional big data can capture more relevant information but may reduce the precision of econometric models. Factor-based models have become popular in economics and finance to handle large datasets effectively.

Advertisement

In the recent study, a Factor-augmented Error Correction Model (FECM) was used to forecast India’s GDP over an extended period. The FECM extracts information from big data using a dynamic factor model and establishes a long-run relationship through an error correction model. This approach reduced 56 macro variables into three factors that explained more than 80% of the variation.

The forecasting results suggest that temperature rise and higher oil prices negatively affect economic growth. The effect of oil prices is particularly pronounced, as they lead to inflation and fiscal constraints. On the other hand, a drop in the cash reserve ratio (CRR) boosts economic growth, suggesting that expansionary monetary policies have a positive impact. Moreover, investments in completed projects enhance economic growth by promoting infrastructure development and other development schemes.

Share This Article