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Perspective

It just doesn’t add up
With economic growth slowing, the stock market might just be staring at more earning downgrades

N Mahalakshmi

Heard of Goodhart’s Law? It says, when a measure becomes a target, it ceases to be a good measure. It is an idea that was first mooted by economist Charles Goodhart, in 1975, and later used widely to criticise Margaret Thatcher for trying to conduct monetary policy based on targets set to regulate broad and narrow money. Goodhart noted that any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.

You probably know what I am hinting at. Yes, the state of India’s fiscal deficit. Goodhart's Law, applied in the Indian context today, makes the fiscal deficit number totally irrelevant as a measure. While the CAG may be raising a stink over how the government is understating its shortfall through off-balance sheet items, analysts don’t seem to get a fix on the actual deficit number, and the industry is left howling over the desperate need for a strong fiscal stimulus to rescue the economy from the grip of a slowdown. 

The irony is the government claims to exercise fiscal prudence by keeping its deficit close to the target set by the FRBM, even when it is clear that neither is it the actual deficit number nor does achieving that so-called target benefit the economy or investors. 

Meanwhile, the ground reality is grim. Growth has been declining for four successive quarters, and worst of all, unemployment is at an all-time high of 6.1%, and the slowdown is only getting worse with the stress spreading to a number of sectors. Amid the gloom, the latest fiscal measures or the FPI surcharge rollback have failed to impress investors, with the stock market not quite roaring back. Read a detailed account of the state of the economy and markets in our cover story and the sentiment among leading fund managers in the country in an Outlook Business survey in this edition. Among other features, we have an interesting story on IBM Research which is leading the way in AI-based innovation in India.

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