Weak business cycle conditions in the Indian economy

INDIA - In Brief 14 May 2019 by Ila Patnaik

For a few years, there has been a tension between two views of the Indian economy. One view was grounded in the GDP data, and saw high GDP growth rates. Another view was grounded in the firm data, and saw weak performance of firms. Our work on building a `coincident indicator' is a valuable path to resolving this tension. We were skeptical about the GDP data and built the coincident indicator without any use of official GDP data. The result showed output at 5% below trend by 2012, and then a slow recovery to about trend levels of output by Jan-Feb-Mar 2019. This is a recovery, but it is not strong business cycle conditions. In the past, a business cycle boom in India has had coincident indicator values like 8% or 10% above trend. Alongside this picture of the real economy were growing concerns about the financial sector. Parts of the banking system, parts of the NBFCs and parts of mutual funds are under considerable stress. A few business groups have run into trouble. While this may be a coincidence, we often see business and financial links between the stressed firms. In the last few days, we have seen two new data releases that show difficult conditions: The year-on-year growth of sales of automobiles came out at -17% in April 2019, which was roughly the worst performance in a decade. In addition, performance of companies in `fast moving consumer goods', such as Hindustan Lever, came out surprisingly weak. We think of these as a combination of weak business cycle conditions coupled with financial stress. As an example, loans from banks and NBFCs are important to both buyers of automobiles and dealers holding inventory of automobiles. The difficulties of the last year...

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