Post-Reform Business Cycles in India

The upward and downward movement in aggregate economic activity around its long-term growth trend is well known as 'Business Cycle' in Economics. Business cycles are observed as recurrent in nature but not periodic, and also noted as persistent enough to destroy the path of long-term growth of an economy. Hence, this phenomenon has received immense attention from academicians and policy makers across the globe. Business cycles are an inherent feature of a market-oriented or industrialised economy. Until the 1930s 'great depression', business cycles were treated as a usual phenomenon in the economy. To the classicalists, disequilibrium in the market is part of an evolving economy.

Over the first four decades after independence, India had been a closed and protected economy. During this period the economy grew on an average rate of 3 to 4%. With the agricultural sector holding the major contribution to national income, the driving forces of Indian business cycles in this period was the 'monsoon'. However, with the changing nature of policy, especially the massive measures of reform adopted during the first quarter of the 1990s, has made the Indian economy transition towards a market economy. By and large, liberalisation and privatisation policies adopted have witnessed perceptible change in every sector of the Indian economy. Growth has been causing structural change in the Indian economy.

This book is based on a study that makes an attempt to address the following relevant questions: has the post-reform Indian economy witnessed business cycles? If yes, what is the pattern of post-reform business cycles in India, what is the length of the post-reform business cycles? Which method captures it accurately? What are the stylized facts of the post-reform business cycles? Do business cycles have any effects on the performance of the Indian manufacturing firms?

The previous studies on the business cycles phenomenon are mainly related constructing leading and coincident indices that help forecast recession and peaks. The scarcity of studies on the aspects of business cycles in the Indian economy is mainly due to the fact that the major driving force of business cycles observed in India, especially during the pre-reform periods, was the 'monsoon'. However, many recent studies have established the transition of the Indian economy from a planned economy to a market-oriented one. These recent developments in the Indian economy have generated the scope for researchers to analyse the business cycles in India. Further, the motivation for the present book comes, firstly, from the fact that the sources of the fluctuations experienced by the Indian economy during the post-reform period were due to factors other than the monsoon. Secondly, there is scarcity of studies on many aspects of business cycles in the Indian economy, such as length of post-reform business cycles, stylized facts of business cycles, and its impacts on the corporate sector, especially the manufacturing sector. Finally, a right understanding of the turning points, stylized facts and the impacts of business cycles has important implications to policy makers in initiating measures of macroeconomic stabilisation at the right time and also market participant to make an informed decision.

The book examines three relevant issues with respect to business cycles in India in the post-reform period. The specific objectives of the study are: to identify the turning points in the post-reform business cycles and measure its length, to characterize the unique features of business cycles in India during the post-reform period, to examine the performance of profitability and financial ratios of selected manufacturing firms over different phases of business cycles, and to analyse how business cycles have influenced the probability of making loss by selected manufacturing firms in India.