Markets based on the experience of the first wave are assuming that the impact of the second wave on the economy is going to be limited and they are playing on the recovery trade. Do you think markets are getting slightly complacent?
The economy will be fine. We will have our issues but the growth will surprise. In fact, we are now saying that for FY22, the consensus real GDP growth forecast of about 9-9.5% is perhaps 200 bps lower than it needs to be and increasingly it is looking likely that FY23 growth numbers need to be bumped up meaningfully. And let me explain why I feel so strongly about this. There are two ways of forecasting; one way of forecasting is you take year-on-year growth and you say that this was my base, on this I grow 9% on that I grow 6.5-7% which is what I think most people do.
In times like these, there is significant volatility at the bottom of the pandemic, the Second Wave. The GDP in our estimate was at one point running 21% below FY20 levels and now it is rebounding very fast. It is perhaps better as a forecasting method to look at the pre pandemic path.
There was a 6-6.5% CAGR pre pandemic path which we were on even before the pandemic hit and we are below that. People generally use the year-on-year growth numbers and then measure where we are versus the pre pandemic path. I think a better methodology given all the volatility in year-on-year numbers is to start with that assumption and then see what growth you are getting.
So on that measure, before the pandemic if you apply a 6.5% kind of growth CAGR for three years, FY23 should have been a 121 or 120.56 if FY20 was 100. Current forecasts by consensus of FY23 GDP are at about 107-108 right now. I see no reason why that should not be at 114-115. We are still below the pre pandemic path and that is something that we need to worry about. But the recovery in terms of estimates and growth is likely to be far better than what is currently being expected.
In times like these, suppose you are a sector analyst or a stock analyst and you need to forecast FY23, what are you going to rely on? You are going to rely on the fact that the house economist or consensus economic growth is x and therefore let me anchor to that. This is not the case in normal years. In normal years, the differences in growth are in tens of basis points okay, if they are at 6.5% I am at 6.3% or something like that.
In these cases where FY23 GDP could be 5-6% higher than what is currently being forecast, the likelihood of earnings estimates needing to get revised is very high. FY23 Nifty EPS has already gone up from about 750-760 in September last year to 860. This is very, very rare. Generally, we are used to starting…
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