Constructing a coincident economic indicator for India : how well does it track gross domestic product?

In India, the first official estimate of quarterly gross domestic product (GDP) is released approximately 7-8 weeks after the end of the reference quarter. To provide an early estimate of current quarter GDP growth, we construct Coincident Economic Indicators for India (CEIIs) using a sequentially expanding list of 6, 9, and 12 high-frequency indicators. These indicators represent various sectors, display high contemporaneous correlation with GDP, and track GDP turning points well. CEII-6 includes domestic economic activity indicators, while CEII-9 incorporates indicators of trade and services and CEII-12 adds financial indicators in the model. We include a financial block in CEII-12 to reflect the growing influence of the financial sector on economic activity. CEIIs are estimated using a dynamic factor model which extracts a common trend underlying the high-frequency indicators. The extracted trend provides a real-time assessment of the state of the economy and helps identify sectors contributing to economic fluctuations. Furthermore, GDP nowcasts using CEIIs show considerable gains in both in-sample and out-of-sample accuracy. In particular, we observe that our GDP growth nowcast closely tracks the recent slowdown in the Indian economy.