A Leading Index for the Indian Economy
Over the last few decades, the Indian economy has experienced both classical business cycles and the cyclical fluctuations in its growth rate known as growth rate cycles. In the years since the liberalization of the economy began, these cycles have been driven more by endogenous factors than by exogenous shocks. From the point of view of both policy-makers and businesses, therefore, it is important to find a way to predict Indian recessions and recoveries, along with slowdowns and speedups in growth. This paper adopts a classical leading indicator approach to the problem. In earlier work, we had used the classical NBER approach to determine the dates of Indian business cycles and growth rate cycles. These dates were used as the reference chronology against which to evaluate the performance of potential leading indicators for the Indian economy. The indicators selected were combined into a composite index of leading economic indicators, designed to anticipate business cycle and growth rate cycle upturns and downturns. Given the paucity of suitable data for the Indian economy, the construction of such a leading index constitutes a significant advance. It also confirms that the durable sequences of leads and lags seen in free market economies are now also evident in the Indian case, permitting useful forecasts of cyclical turning points.
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