OECD data indicates a deep downturn for India

The Organization for Economic Cooperation and Development (OECD) has a composite leading indicator (CLI) that identifies turning points in several economies. Early signs of economic expansion or slowdown can be seen from this indicator.

Last week, OECD said the CLI for November was predicting a deep downturn not only for the OECD economies but also for China, India and Russia. The chart shows the CLI for India and China.

Growth cycle phases of the CLI are defined as follows: expansion (increase and above 100), downturn (decrease and above 100), slowdown (decrease and below 100), recovery (increase and below 100).

Going by this description, the CLI has been predicting not just a slowdown but a downturn in the Indian economy since May 2008. The historical CLI data show the Indian economy peaking in April 2007, remaining there for a few months and then starting to slow in August 2007.

After the dotcom bust, the CLI for India first showed signs of a slowdown in June 2000, which became a downturn in November of that year. The bottom was reached with a CLI reading of 96.4 in January 2002, but it wasn’t till November 2003 that the CLI went above 100, which indicated expansion. Note that the stock market started to rise only in mid-2003, which shows the CLI could give an early (in this case very early) signal of a market upturn.

More importantly, the CLI for India was at 93.9 in November 2008, a level not seen since 1994, when the indicator for India was first computed. Apart from 2000-03, the only other period during which the CLI for India fell below 100 was for a brief period in 1998.

The implication is obvious: The severity of the current downturn in India is exceptional and nothing like it has been seen at least since 1994.

The other reason for concern is that the CLI for China has been falling at an alarming rate and was at 88.5 in November. Indeed, among all the economies for which the OECD computes leading indicators, China’s was the lowest reading, followed by Russia at 89.8. China’s CLI was more or less at par with India’s last August, but dropped off a cliff in October and November. In fact, the CLI for China is now very near the level reached by Indonesia’s CLI during the depths of the Asian crisis, when it reached a low of 87.8 in 1998.

In short, the current crisis seems to have affected China as badly as Indonesia was affected during the Asian crisis. That could have serious repercussions not only for stability in China but also for other countries, including the possibility of trade wars should a desperate China devalue the yuan.

Source:livemint