India and U.S. upturns this year

'India should expect an upturn this year'

For over a decade, the New York-based Economic Cycle Research Institute (ECRI), an independent research firm, has been spot on about which way economies will turn. So, when ECRI’s director of research Anirvan Banerji predicts that India should expect an upturn in its economic growth later this year, it lends weight to the view that revival is on the cards.

Set up by the legendary Geoffrey H Moore, whom the Wall Street Journal had dubbed ‘the father of leading indicators’, ECRI now tracks some 20 large economies across the spectrum including the US, Canada, Brazil, the UK, Germany, France, Japan, China and India. In the process, it provides critical information about downturns and upswings to professional investment managers, corporate decision makers and policy makers in the government and multilateral agencies. In an exclusive interview with ET , the IIT Kharagpur and IIM Ahmedabad alumnus shares his thoughts on the Indian and global economy. Excerpts:

What is your call on India’s economy right now?

India is a lot more export-oriented now than earlier. To that extent, external shocks are causing damage to the economy. However, India is a world in itself and, thus, the internal dynamics largely drives the economy, which makes it less vulnerable to external shocks. In India, there’s no recession. Nevertheless, it’s the country’s worst slowdown in decades. Incidentally, ECRI had predicted this in July 2008 itself. However, our growth rate of leading indices have turned upward for India now. We can definitely expect the economy to see an upturn later this year.

What do you think finance minister Pranab Mukherjee should do to propel the economy along the revival path?

Whatever Mr Mukherjee does, it will only have a marginal impact on the economy in the short run. His policy decisions may impact the economy in the medium term or in the long run, but not immediately. The outcome of monetary measures can only be seen in several months’ lag.

What’s your take on the current global economic situation?

The US economy officially went into recession from December 2007. But our leading index has indicated the recession six months in advance in June 2007 and we were emphasising the need for government intervention since then. The current recession may last for a little longer than 16 months. The situation in the Eurozone is not so good. Japan is a mixed bag while non-Japan Asia is likely to see an uptick later in the year.

As an expert on the subject, what do you see recession as? When does an economy go into a recession?

Recession is a vicious cycle of a specific kind. A fall in expenditure leads to a decline in production and employment and subsequently a fall in income too. This again leads to a fall in expenditure and the cycle goes on. The impact of a recession does not merely restrict itself to any specific sector. It spreads industry to industry and region to region. When a recession sets in, any internal or external shock looms large and has its impact felt with multiplier effect. A country can withstand such shocks when the going is good. It is a widely accepted myth that economic recession begins when GDP growth becomes negative for successive two quarters — it sets in much before that. An economy can be in recession even when GDP is showing a growth. There’s also a misconception that a recession is typically caused by unpredictable shocks. But we think, economies can absorb shocks when the going’s good. The shocks become evident impact only when the economy’s weak.

What methodology do you use before making the calls on the economies?

We don’t have any simple rule for pinpointing turns of an economy. As a thumb rule, we compare the recent movements of our leading indicators with previous business cycles. When the indices change direction in a way that is pronounced, persistent and pervasive across individual components, then only we call it a genuine turn in a business cycle.

We have a set of leading indices to determine the course of the economy. Unlike conventional practice, we don’t use time-series analysis to predict recessions. Nor do we go in for data fitment as is usually done. Results of time-series analyses depend on a set of assumptions. It does not work in our stream. We use high-frequency data. In the US, we use weekly data. However, for India, we only use quarterly data in the absence of weekly statistics.