Indian Economic Review

Special issue on business cycles

(January-June 2001)

Delhi School of Economics

311 pages/Rs 150 (annual subscription)

At a time when the industrial sector in India is suffering from a severe slowdown, research in business cycles has generated considerable interest. With the recent announcement by the National Bureau of Economic Research (NBER) that the US economy is suffering from a recession, a special issue of The Indian Economic Review on business cycles is very timely. This special issue is dedicated to Geoffrey Moore who worked on business cycles at the NBER and Economic Cycle Research Center at New York.

Business cycle research traditionally focused on the indicator approach to monitoring and forecasting of business cycles. This involved the development of leading, coincident and lagging indicators for predicting business cycles. Recent research uses the Markov switching model to assess the probability of a change in regime that may be identified as a normal state or a recession.

The volume contains 16 papers, a number of which are in the economic indicator analysis tradition of Moore, especially by the authors from the Economic Cycle Research Center while the others use the Markov approach.

Since research on business cycles is new in India, Banerjee, along with co-author Layton, in one of the four papers on India, discusses the issue as to which series should be used to examine the presence of cycles or turning points in India.

He disagrees with the view that GDP, even if it were available monthly, or IIP, that measures monthly industrial production, is a good measure. He argues that a broader measure must be used that includes employment, sales and income. He suggests that such a measure will capture more of the cycles experienced by the Indian economy than the one that includes only a measure of output.

Indeed, such a measure has been constructed by him and Dua in a previous paper, following Moore’s tradition of including more variables and not just relying on the GDP. In this volume, they have a paper that discusses the construction of a leading indicator that leads that coincident indicator.

The construction of the index is not data determined but follows Moore’s method of including series that have proved useful elsewhere. According to the authors, the monthly leading indicator index is based on indicators from different sectors of the economy, like money supply and interest rates, construction and corporate sectors. (It would be useful to know the data, sources and behaviour of these series.)

As they expected for the Indian economy before liberalisation, it was unable to lead the coincident indicator before the 1990s since the economy was not a market economy. In the 1990s, the Indian economy is said to have experienced a recession beginning in May 1996 and ending in February 1997. (The leading indicator has not predicted another recession since that one. Thus, technically the Indian economy is not yet in a recession, nor is one expected.)

Chitre’s work represents the first application of the NBER methodology to India. He analyses 94 monthly time series and prepares a list of indicators of recessions and revivals and tracks growth cycles in India over the period 1951-82. Chitre’s correspondence with Moore on the subject is also reported in the paper. The fourth paper on business cycles in India by Gangadhar Darbha applies the regime switching model to Indian data.

In a paper on the usefulness of consumer and business confidence indices in predicting turning points in the US and the UK, Batchelor shows that a fall in business confidence decreases the probability of staying in the high-growth state. Similarly, Ivanova and Lahiri evaluate the usefulness of the consumer sentiment index to predict aggregate consumption and its components.

Practitioners and researchers working on business cycles will find the volume useful reading. However, as the volume focuses on the technical aspects of predicting business cycles, those looking for answers to what causes business cycles such as the recession period of 1996-97 may be disappointed.