The Indian Economist’s Guide To Living In The Present

Between the old GDP series, the new GDP series, the back data for the new series and the many revisions for each individual reading, economists have been left searching for underlying trends amidst increasingly confusing data.

“For analysts, the revisions make it difficult to gauge economic activity in India and sometimes forecasting feels like shooting at a moving target, said Hugo Erken, head of international economics at Rabobank.

This is true not just for private-sector economists but also for central bank economists who are innovating with their leading indicator and nowcasting models to track the state of the economy. But as the old adage goes, no two economists agree on what the best way to do this is.

BloombergQuint spoke to senior economists to judge what they believe has proved to be among the best indicators of underlying economic conditions.

RBI’s New Nowcasting Model

Recently, the central bank also updated its nowcasting model for GDP growth. It added financial indicators such as the Sensex, nominal effective exchange rate and bank credit to the list of data points already tracked, as they were found to help predict turning points in the economy. The extracted trend, the RBI said, provides a real-time assessment of the state of the economy and helps identify sectors contributing to economic fluctuations.

The RBI’s researchers also reviewed what other central banks used along with more commonly used high-frequency indicators. For example, the Federal Bank of New York used data on housing starts, building permits and of construction put in place to nowcast GDP. The Bank of England used data on mortgages approved and claimant count rates for it’s nowcasting model.

The RBI also evaluated it’s expanded nowcasting model against nightlight data to determine if both datasets correspond well. They do.

Private Models

Economists track different indicators as a proxy for economic health. Here are a few of them:

Flow Of Funds: Saugata Bhattacharya, chief economist at Axis Bank who currently ranks first on Bloomberg for accuracy of his estimates, has found the overall flow of funds to be a critical indicator in the current situation. While this data is published with a lag by the RBI, it can be compiled from commercial paper, bank credit, corporate bonds and external commercial borrowings to get a sense of the flow of commercial credit, he said.

Real Rate: Indranil Sen Gupta, chief India economist at BofA Securities, emphasises on real lending rates. He uses the marginal cost of lending rate, adjusted for core wholesale inflation, to determine real rates. Separately, the BofA India Activity Indicator includes seven components, of which real cash demand alone comprises 35.7 percent. In the absence of data on retail sales, currency in circulation, adjusted for inflation, serves as a good proxy, Sen Gupta said.

Credit, Imports And Inflation: For Priyanka Kishore, head of India and South East Asia economics at Oxford Economics, indicators of overall activity such as bank credit, core imports, and core inflation are less volatile than some other indicators like industrial production. These, she said, have worked well in predicting turning points and also gauging the extent of slowdown.

Car Sales, Sensex, Money Growth And More: Besides these economic indicators, Rabobank tracks monetary base, the volatility index, Nifty, Sensex and Mibor, according to the RBI’s research paper. Hugo Erken, head of international economics at Rabobank, said while it’s always a combination of different factors that is used to determine the state of the economy, car sales, the services PMI, Sensex, oil consumption and money growth have a very significant impact on growth. That’s why these indicators are relevant in the nowcasting model.

Multiple Footfalls, Newspaper Sales: Economists are also looking beyond conventional high-frequency indicators to gauge the state of the economy. An economist on the condition of anonymity said he had created three separate indices to track investments, urban demand, and rural demand. While the index for investments includes indicators such as the BSE Capital Goods index, the index for urban demand tracks footfalls at PVR. For rural demand, he used Dainik Bhaskar’s sales.

Air Cargo And IIP: Pranjul Bhandari, chief India economist at HSBC, has created an India growth tracker to help spot turning points. It brings together nine activity indicators that are seasonally adjusted, normalised and combined using weights derived using principal component analysis. The analysis assigned the highest weight to air cargo and Index of Industrial Product of the nine variables.

Imports Other Than Gold, Oil: Sameer Narang, chief economist at Bank of Baroda, said non-oil, non-gold imports have shown a very high correlation with the state of the economy. India continues to maintain a trade deficit even after excluding oil because of it’s imports of capital goods, electronics, chemicals, and other key consumables, he said. These items are especially responsive to demand and imports fall when inventory build-up in the economy increases, Narang said, explaining the correlation.