Both OECD’s Composite Leading Indicators and HSBC’s PMI suggest economy returning to high-growth path


Two developments last week brought much-needed cheer to the economy — the 3.8 per cent growth in industrial output (IIP) for November 2014, a six-month high, and the surprise 25 basis points repo rate cut by the Reserve Bank of India. Do these New Year gifts signal that the country will be back on the high growth path soon?

This looks likely when read in conjunction with the ‘lead’ indicators of the economy. The OECD Composite Leading Indicators (CLI), whose numbers were released last week, is one such. Using published GDP numbers of a country as the reference, the CLI is designed to signal turning points in economic activity at least six months in advance.

For example, back in February 2009, when pessimism was still high, the CLI pointed to a possible bottoming out in economic downturn in India, hinting at the beginning of an upswing, which happened in 2009-10.

Good times ahead

With its trend line at 100, the CLI numbers trace an economy through the four stages of expansion, slowdown, recession and recovery. A CLI above 100 indicates ‘expansion’ and a reading below 100 but rising points to a ‘recovery’.

As early as December 2013, at a reading of 98, the CLI indicated a ‘tentative positive turning point’ for India. This was even as the IIP hovered in the negative territory and the GDP continued clocking sub-5 per cent growth. But IIP growth slowly moved into positive territory in the later months (October 2014, being an exception) and the GDP growth breached the 5 per cent mark in the first two quarters of this fiscal.

Since then the CLI has strengthened steadily, with the latest report for November 2014, putting the number at 99.5. This indicates that the economy is likely to move from the ‘recovery’ mode into the ‘expansion’ zone soon and the days of high growth may not be far away.

Support from PMI

Another lead indicator, the HSBC Markit Purchasing Managers’ Index, also supports this view.

Surveying purchasing executives in over 500 manufacturing companies in India, the PMI captures the trends in parameters such as new order flows, stocks of raw materials and finished goods, backlog of work and employment trends.

Hence, unlike the IIP which reflects the production levels on the ground, the PMI is designed to indicate industrial activity in advance. A PMI reading above 50 indicates expansion while one below that points to a contraction.

Almost at the same time as the turnaround in CLI, in November 2013, the PMI of manufacturing companies breached the 50 mark after showing a contraction in the previous months. It has remained above 50 since then with the latest December 2014 PMI touching a two-year high of 54.5.

As per the survey reports, consumer goods companies were the first to report improving demand. By April 2014, intermediate goods makers followed. Spurts of improvement by capital goods companies came in by mid-2014.

The latest report points to a two-year high in accumulation of pre-production inventories and the fastest accumulation of finished goods inventories in the last 10 years, in anticipation of rising demand.

The icing on the cake is the successive weakening of input cost pressures.

The only sore point is a building up of backlog of work due to power shortages and delays from suppliers. If this is addressed, with higher demand, cheaper raw materials and lower interest costs, India Inc is poised for better times in the months to come.