Leading economic indicators are among the many things that became more popular during this Great Recession, which is under serious threat of being downgraded to a kind of severe, but regular, recession. There are many such indicators for developed economies, but for India the only popular composite leading indicator is published by OECD, that club of rich nations. 

Over the last several months, some of our financial newspapers have tracked this index closely. When they started, it was for clues about how much worse can the economy get. As the months progressed, it was for feeble signs of a possible recovery. But, until March, the OECD leading index for India refused to oblige and kept drifting down. One newspaper tried to find out some correlation between the OECD indicator and Indian stock market returns and came up with the fascinating conclusion that economic growth is not much of an influence on equity returns in India!

Finally, OECD said this week that its India indicator for the month of April has improved from the previous month. The index inched up 0.4 points from March, but was 7.9 points below last year’s level. The up move is barely significant, but it is still a trend reversal. Most of our financial newspapers reported this yet another positive economic development promptly.

But, how significant is this so called leading index?

First of all, it is not quite a ‘leading’ index. The most recent index level available is for April. Without much of a time gap, we will have hard data on how the economy performed during that month.

The composition of the index is also quite interesting. They are industrial production, industrial confidence indicator from the NCAER, narrow money supply, rupee-dollar exchange rate, deposit rates, total imports and the BSE Dollex stock market index. From these components, it is quite obvious why the OECD composite turned direction in April and will move up again in May and possibly in June as well. Just the stock market index gains should be enough to keep the ‘leading’ indicator trending higher.

So, we have this OECD index which is being pushed up mostly by stock market gains and is in turn signaling to the market that the economy is improving. Which obviously will possibly lead to more market gains and further strength on the ‘leading’ indicator!