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Is the economy at an inflection point?

Given the patchy performance of lead indicators, it seems premature to conclude that the economy has turned the corner.

Sanjiv Shankaran | February 7, 2012 | Updated 12:05 IST

A part of recent economic data suggests the outlook is not uniformly gloomy. Are the mixed signals, however, enough to conclude the business cycle has turned and the economic momentum is again building up?

Finance ministry's chief economic advisor Kaushik Basu believes recent economic data signals a cyclical upswing. "We are at an inflection point," Basu said during a meeting with journalists on Tuesday. "We are beginning to turnaround," he added.

Basu's case rests on recent readings of four key indicators, which are categorized as lead indicators of the Indian economy. Basu identified recent data on industrial output, bank credit to industry, performance of core sectors such as steel and surveys of business managers as reasons for his optimism.

Sanjiv Shankaran
Sanjiv Shankaran
In November and December, data of lead indicators improved as compared to the preceding two months. In November, industrial output rose 5.9 per cent on year after having contracted 4.7 per cent the month before. Year-on-year bank credit to manufacturing in November grew 21.8 per cent, higher than the corresponding period of the previous year, and manufacturing surveys moved up in December.

In addition, there are indications that headline inflation is finally beginning to dip. It was 7.5 per cent in December and Basu forecast it would drop below 7 per cent in January.

Basu's call may have been premature. The signals remain mixed.

"On the overall trend, I would say this is some sort of turning point," said N.R. Bhanumurthy, professor at National Institute of Public Finance and Policy. "I would not say it's robust, one may have to wait for one more month," he added.

Bhanumurthy felt mixed signals from some lead indicators and Reserve Bank of India's apprehension about inflation meant it was too early to confidently to conclude that the cycle has begun to reverse.

The latest data set to be released sent mixed signals and suggest it may be too early to take a call on a cyclical upswing. On 30 January, government released core sector data for December. The growth rate was 3.1 per cent, a decline compared to the previous month's growth rate of 6.7 per cent.

Core sector (made up of coal, steel, cement, fertilizers, electricity, natural gas, crude oil and refinery products) has a weightage of 37.90 per cent in the industrial output. The dip in December growth rate means the overall industrial output for the month could well fall.

Another important lead indicator, output of capital goods, continues to be negative. For three consecutive months, September to December 2011, output of capital goods has contracted.

Given the patchy performance of lead indicators, it seems premature to conclude the economy has turned the corner. The inflection point may be some time away.

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