An Application of the Indicator Approach to Developing Coincident and Leading Economic Indexes for India

Business cycle analysis relying on composite indexes provides an understanding of the direction of the economic activity in market economies that is essential for macroeconomic policy formulation and decision making. With the liberalization of the Indian economy since 1991, studies on business cycle for India have received renewed attention in the context of a developing market economy. In this chapter, we describe our proposed business cycle indicators, particularly coincident and leading indicators, that provide tools for tracking and anticipating cyclical movements following The Conference Board’s indicator approach. This approach which is focused on classical business cycles differs from other studies that develop cyclical indicators following growth rate cycles or growth cycles. We begin by proposing a coincident economic index (CEI) that can be used to describe the historical development of the Indian business cycle since 1990. We show that by taking a broad definition of economic activity and the consensus of cyclical movements among several coincident indicators we can obtain a reliable chronology of the reference cycle. We also discuss how this index of coincident indicators can be used to determine a growth cycle chronology. Then, we review a number of leading indicators and propose the selection of indicators as components of a leading economic index (LEI) that help to anticipate the turning points in the business cycle of India’s economy.