The need for a business cycle dating committee
It has been a quarter of a century since India commenced the journey of opening its economy to the world. But the idea of a business cycle dating committee (BCDC) for India has not received sufficient attention. Most of the research in business cycles is done keeping in mind advanced industrial economies. The scarcity of research for studies of business cycles in India along with data limitations might be some of the reasons why policymakers in India are not too concerned about this issue.
What are business cycles?
Business cycles are the short-run fluctuations in aggregate economic activity around its long-run growth path. It is the “ups and downs” in economic activity, defined in terms of periods of expansion or recession. The US’ National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales.
What does a BCDC do?
A BCDC maintains a chronology comprising alternating dates of peaks and troughs in economic activity. It analyses and compares the behaviour of key macroeconomic variables such as consumption, investment, unemployment, money supply, inflation, stock prices, etc., which may have different dynamics before, during and after the recession. It identifies turning points which act as a reference point for the construction of coincident, leading and lagging indicators of the economy. Timely identification of economic contraction and its severity allows policymakers to intervene, and thereby reduce its amplitude and duration. In addition, firms can re-evaluate projections of sales and profits, and the consumers their purchasing and investment plans, based on information on transitions to new business cycle phases.
International experiences of business cycle dating committees
The NBER’s BCDC maintains a chronology of the US business cycle. NBER is a private, non-profit, non-partisan organization conducting economic research and regarded as authoritative by both academic researchers and the public at large. The committee was created in 1978 and has been chaired by Robert Hall from Stanford University since its inception. The committee waits long enough so that the existence of a peak or trough is not in doubt and does not follow a fixed time rule.
For the euro area, it is the Centre for Economic Policy Research (CEPR) which does this job. Like the NBER, CEPR is also an independent, non-profit organization. CEPR dates the business cycle for the euro area as a whole and not for any individual country. Although the countries in the euro area have adopted a common monetary policy since 1999, countries have heterogeneous institutions and policies. Hence, some of the criteria of dating business cycles for CEPR differ from those for the NBER, although similar definitions of a recession are adopted by both these organizations.
Even an emerging market economy such as Brazil has a BCDC known as O Comitê de Datação de Ciclos Econômicos (Codace), created by the Brazilian Institute of Economics. It was founded in 2005 and replicates the experience of the NBER BCDC and CEPR.
Why does India need a BCDC?
By maintaining a chronology of business cycles, India will be able to better monitor the economy. A BCDC can also maintain an index of coincident, leading and lagging indicators for the Indian economy. Currently, India relies mostly on individual studies for the dating of business cycles. The Reserve Bank of India (RBI) set up a working group of economic indicators in 2002 and a technical advisory group (TAG) on the development of leading indicators for the Indian economy in 2006, both under the chairmanship of R.B. Barman.
The working group proposed a standing committee for business cycle analysis. Its job was the same as a BCDC, i.e., maintaining historical dating of business cycles. TAG suggested a methodological framework for the construction of coincident, leading and lagging indicators along with a composite index for the Indian economy. It also reviewed different techniques adopted by various international organizations.
Who should be in charge of a BCDC?
Whether a BCDC should be part of the government, the RBI or an independent research organization with high credibility is debatable. Notably, the members of all the aforementioned BCDCs are independent scholars. As a result, the decision regarding the dating of business cycles is not political. This is important in a country like India where GDP numbers are contentious and political parties try to score points on these numbers. Also, the BCDCs are created by independent non-profit organizations. This responsibility does not lie with the government or with the central bank.
Still, creating a BCDC will go a long way in maintaining transparency, strengthening the information base for the Indian economy and helping gauge better the changing nature of the Indian economy. This will also help India to be more in synchronization with the other developed and emerging market economies.
Mayank Gupta is a research scholar at the department of economics (autonomous), University of Mumbai.