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An Upturn In India’s Growth Cycle Is In The Offing

Economic growth in India has moderated over the last five quarters, falling to its lowest in six years in the April-June 2019 period. While many believe that growth may have reached a trough, the timing of a turnaround remains uncertain.

The Economic Cycle Research Institute’s Lakshman Achuthan believes that a turnaround is in sight. The ECRI’s forward-looking leading indicators on India’s economic cycle tell us that there is a bottoming-out of growth that is in the offing, Achuthan, co-founder of ECRI, told BloombergQuint in an interview over the phone. He declined to share readings of ECRI’s proprietary leading indicators with with BloombergQuint.

 "While Indian economic growth has slowed, ECRI’s forward-looking ‘Indian Long Leading Index’ has begun to improve, suggesting that Indian economic growth will start bottoming out and improve in the coming quarters."

Achuthan cautioned that this reversal is not likely to happen immediately and could take another few months. Over this period, policy decisions such as lower interest rates and easier flow of credit would start to aid the economy.

The Reserve Bank of India has cut its benchmark policy rates by 110 basis points since February this year. Liquidity, which was in deficit in the first half of this year, has also turned surplus. Economists expect these two factors to support the economy in the remainder of the financial year.

Monetary policy and improved credit flow impact the economy with a lag, said Achuthan, adding that he adding that he feels confident that a growth cycle upturn is in the offing.

 "We suspect that we are in a trough but I can’t say it has happened. It might be after 2-3 months that the actual trough is. Data may get weaker before it can rebound... I do feel comfortable saying that a growth rate cycle upturn is in the offing. We are bottoming-out somewhere here."

The ECRI’s leading indicators are often cited by Monetary Policy Committee member Pami Dua, who has been a senior research scholar with ECRI. As early as April, Dua had flagged off a turn in the ECRI’s Indian Leading Index, which indicated improving growth outlook.

Since then, however, national income data released by the Indian Government has shown a further deterioration in GDP growth from 5.8 percent in the January-March 2019 quarter to 5 percent in the April-June quarter.

Achuthan believes that the impact of policy initiatives, such as pushing more credit through the system, will play out with a lag. “If a household has access to credit, it becomes a process. It is not instantaneous. There is a debate — do we buy the car, do we buy the refrigerator? It eventually hits the economy with a lag. It does not have an immediate impact on growth,” he said.

While growth may pick-up from the lows of the first quarter, ECRI’s indicators do not suggest any support from exports.

Export growth prospects have dimmed, according to ECRI’s forward looking ‘Indian Leading Exports Index’. This deterioration is driven in part by the worsening global industrial growth outlook.

 "The global industrial slowdown — which began before the trade wars — will continue to weigh on exports. It’s not specific to India but India will have to play along."

Weighing in on the debate over whether India’s growth slowdown is structural or cyclical, Achuthan said that both elements could be part of the sluggishness. He, however, said that India remains well-positioned from a global standpoint.

Potential long-term trend growth has been decelerating for all major economies, with the exception of India, according to Achuthan. The reason is that both demographics and productivity growth trends have been deteriorating across the developed world and some big developing economies like China. “India actually looks pretty darn good. These indicators are both positive here.”

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