Leading Indicators

of the Indian Economy

ADITYA BHANDARI

HS 700: Applied Economics

Course Project Presentation
Introduction
 History of the Indian Economy
 The Liberalization Process: The 80s and the 90s
 Beneficial Effects of the Reform Process
 We are the Fourth Largest Growing Economy in terms
of PPP with a GDP of US $3.36 trillion
 In Exchange terms, we are the Tenth Largest in the
world with a GDP of US $ 691.87 billion (2004)
 Second Fastest Growing Major Economy of the World
with a growth rate of 8.1% for the 1stQ of 2005-06
Introduction
 The increasing importance of the Indian Economy
has led to a need to Forecast the Performance of
the of the Indian Economy
 Monitoring of the Indian Economic Cycle has
become an increasingly attractive option for this
 Dua et. al. initially propounded an index based on
concurrent indicators but using an index based on
leading indicators is seen to be more appropriate.
The Indicator Approach
 The Indicator Approach exploits the fact that
different time-series do have different cyclical
periods
 Time-series can be classified into Coincident,
Leading and Lagging Indicators
 Coincident: Measures of Output, Income,
Employment and Sales
 Leading: Placement of New Orders, Intention to
Build and Changes in Profitability
 Lagging: Installment Credit Outstanding and
Interest Rates
The Ideal Indicator
 It would cover half a century or longer, thus
showing its relation to the economic cycles over
a variety of conditions
 It would lead the month, around which cyclical
revival centers, by an invariable interval of say,
three months or even better, six months. It would
also lead the central month of every cyclical
recession by an invariable time interval, which
might differ from the lead at revival.
The Ideal Indicator
 It would show no erratic movements, that is, it would
sweep smoothly up from each cyclical trough to
cyclical peak and then sweep smoothly down to the
next trough, so that every change in its direction
would herald the coming or recession in the general
economy or business.
 The cyclical movements would be pronounced enough
to be readily recognized, and give some indication of
the coming change
 It would be so related to the general economic activity
as to establish as much confidence as the nature of
such things allows that its future behavior in regard to
economic cycles will be like its past behavior
Illustration of a Leading Indicator
List of Leading Indicators
 Trends in Gross Domestic Product (GDP): Contribution of Agriculture, Industry and
Services
 Purchasing Power Parity (PPP) Index
 Fiscal Deficit
 Trends in Inflation Rate
 Interest Rates
 Credit Off-take
 Balance of Payment
 Foreign Exchange Reserves
 Crude Oil Rates
 Foreign Direct Investment (FDI) Trends
 Rain fall Index
 Sensex
 Exchange Rate
 Savings/GDP Ratio
 Human Development Index
 Electric Power Generation
Gross Domestic Product
GDP = consumption + investment + government
spending + (exports − imports)
 Consumption, Investment: Final Expenditure on
Goods and Services
 Export-Import: Balance of Trade
 Consumption: Private and Public
 Significance of GDP
GDP: Indian Scenario
GDP: Indian Scenario
GDP: Indian Scenario
 The GDP growth trend for the last three years
appears to indicate the beginning of a new phase
of cyclical upswing in the economy from 2003-04
 The initial momentum to this new phase of
expansion, in 2003-04, was provided by
agriculture
 Industry and services have acted as the twin
engines propelling overall growth of the economy
Grenville Savio Noronha
Human Development Index

 HDI is a measure of poverty, literacy, education,

life expectancy, childbirth, and other factors.

 It is a standard means of measuring well being,

especially child welfare.

 HDI stresses the importance of the quality of life.

Human Development Index

The three basic dimensions of HDI :

1) Life expectancy at birth

2) Knowledge (as measured from adult literacy rate)

3) Standard of living
Human Development Index

EMPLOYMENT:
 India’s labour force has reached 375 million

approximately in 2002, and it will continue to

expand over the next two decades.
 The actual rate of that expansion will depend on

several factors including population growth,

growth of the working age population, labour force
participation rates, educational enrolment at higher
levels and school drop-out rates.
 Approximately three-fourth of the unemployed are

in rural areas and three-fifth among them are

Human Development Index

EDUCATION :
 Literacy rates in India have arisen dramatically

from 18% in 1951 to 65% in 2001, but these rates

are still far from the UMI reference level of 95%.
 Literacy among males is nearly 50% higher than

females, and it is about 50% higher in urban areas

as compared to the rural areas.
 Literacy rates range from as high as 96% in some

districts of Kerala to below 30% in some parts of

Madhya Pradesh.
Human Development Index
 In terms of total investment in R&D, India’s
expenditure is 1/60th of that of Korea,
1/250th of that of the USA, and 1/340th of
that of Japan.
 More significantly, atomic energy, space and
defense research account for 71% of all
central spending on science and technology,
which means that relatively little is left for
investment in agriculture, energy,
telecommunications and other crucial sectors
within the sphere of science and technology.
Human Development Index

 R&D expenditure even in India’s fast-growing IT

sector has been averaging around 3% of sales
turnover (STO), which is much lower as compared
to the 14-19% expended by internationally reputed
software firms.
 These low figures reflect on our R&D
performance. India’s share of global scientific
output in 1998 was only 1.58 per cent of the
world’s total.
 Out of 500,000 new patent applications filed
globally each year, China accounts for 96,000 and
 Human Development Index

HEALTH :
 Like population growth and economic growth, the health of

a nation is a product of many factors and forces that

combine and interact with each other.
 Economic growth, per capita income, employment, levels of

literacy and education—especially among females—age of

marriage, birth rates, availability of information regarding
health care and nutrition, access to safe drinking water,
public and private health care infrastructure, access to
preventive health care and medical care, health insurance,
public hygiene, road safety, and environmental pollution
are among the factors that contribute directly to the health
of the nation.
Human Development Index
Human Development Index
Gnanasundaram C
MONSOON AND ITS IMPACT ON AGRICULTURE

 58% of country's population depends on agriculture

 27% of India ’s GDP comes from its agricultural production.

13-18% of India ’s total annual exports are agricultural

products.

 Good monsoon always means a good harvest

 Bad monsoon results in a big loss in the country GDP levels.

 MONSOON AND ITS IMPACT ON AGRICULTURE

 IMD predicts the onset date and rainfall potential of the monsoon

 Output growth severely affected by rainfall, especially in earlier

years when share of agriculture was 40 – 50 %

 data crucial for proper estimates of production function, tfpg etc.

 Monsoon facilitated an impressive growth rate of 9.6% in 2003-04

 Fell steeply to 1.1% in the current fiscal year

 MONSOON AND ITS IMPACT ON AGRICULTURE

Construction of Rainfall Index

 For each year, only rainfall for four months, June through

September, are considered.

 Area of each state =As

 (Mean) Rainfall for each rainfall station, 1871-2003: μs

 Standard deviation for each rainfall station, 1871-2003: ss

 (4 months mean) Rainfall for each station and year: Rs

 Define: Js = (Rs - μs)/ss; for each rainfall station and year

 Yearly Rainfall Index = S (As* Js)/SAs

 FDI in India
 FDI is investment made by a foreign individual or
company in productive capacity of another country. It is
the movement of capital across national frontiers in a
manner that grants the investor control over the acquired
asset.
 India is considered a stable country for investing in by
corporate overseas.
 India has displaced US as the second-most favored
destination for (FDI) in the world after China according to
an AT Kearney's FDI
 FDI is a tool for jump-starting economic growth through
 FDI in India
FDI has an impact on
1. Country's trade balance
2. Increasing labour standards and skills
3. Transfer of new technology and innovative ideas
4. Improving infrastructure, skills and the general business
climate.
US INVESTMENT IN INDIA
 U.S. is one of the largest foreign direct investors in India.
 The stock of actual FDI Inflow increased from U.S. $11.3
million in 1991 to US $4132.8 million as on August 2004
recording an increase at a compound rate of 57.5 percent per
annum.
Top sectors attracting FDI from USA are

 Fuels (Power & Oil Ref.) (35.93%)

 Telecommunications (radio paging, cellular
mobile & basic telephone services) (10.56%)
 Electrical Equipment (including Computer
Software & Electronics) (9.50%)
 Food Processing Industries (Food products &
marine products) (9.43%)
 Service Sector (Fin. & Non-Fin. Services)
(8.28%).
 India's English-speaking population is highly valued by American,
Canadian and British investors.

 India received investments from GE Capital, American Express,

Citibank, Conseco, British Airways, Dell Computers and Reuters.

 This FDI resulted in the development of call centres, back office

support and facilities to handle knowledge-intensive activities.

 From software giant Microsoft to telecom biggies Nokia and

Samsung to auto majors Honda and Toyota, global players now
eye India as the most attractive destination for investment.

 Although far behind China, India figures among the ten most
attractive destinations for foreign investment, according to a new
survey.
Lt Col D G Naik
SENSEX
 Definition
 Significance
 Calculation Methodology
 Selection
 Free Float Market Capitalization (from September 1,
2003 )
 Calculation, closure
 Maintenance
Definition
 Sensitivity Index
 Base Year 1978 – 79, Base = 100
 Basket of 30 constituent stocks representing a
sample of large, liquid and representative
companies from diverse sectors.
Significance
 Barometer of Business climate.
 Facilitates capital formation.
 Domestic Market/ Institutions.
 FIIs.
 FDIs.
 Likely to lead to boom in other asset classes as the
profits get ploughed.
Choice of constituents,
Calculation Methodology
and Maintenance
for SENSEX
Journey Of SENSEX
CONCLUSION
 Leading Indicators relative to the objective.
 Choice.
 Standardization.
 Construction of Ideal Leading Indicators – not
easy.
 Forecast based on Leading Indicators – a useful
planning tool.
References
1. Pami Dua and Anirvan Banerji, “A leading index for the Indian economy,”
Working paper no. 90, Centre for Development Economics, March, 2001.
2. J –D Lindlbauer, “Business Cycle Indicators From Qualitative Data,” In
Searh of Economic Indicators Essays on Business Surveys (Lecture Notes in
Economics and Mathematical Systems, Werner H. Stringel, Ed. Berlin:
Springer-Verlag, 1977.
3. Raj Kapila and Uma Kapila, Understanding India’s Economy Reforms: The
Past, The Present and The Future, New Delhi: Academic Foundation, 1996.
4. Uma Kapila, Indian Economy since Independence, New Delhi: Academic
Foundation, 1998
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