Understanding India’s Business Cycles: What the Research Tells Us

By ISPP
Published Feb 20, 2026

This month, the macroeconomic conversation in India has centred on liquidity: year-on-year bank credit is expanding at 13.1% while deposits are growing at 10.6%. This has pushed the system-wide credit-to-deposit ratio to an all-time high of 82.2%. While these numbers might sound alarming and suggest signs of stress, research indicates they actually reflect the normal mechanics of the modern Indian business cycle. All economies experience business cycles that move in waves. Periods of expansion — where credit flows and investment picks up — are followed by slowdowns in which activity contracts. In this post, we draw on existing literature to explore how India’s business cycle has evolved, the extent of its volatility, its key drivers, and how to navigate it.

Post-1991 Reforms and the Transformation of India’s Business Cycle

India’s business cycles have fundamentally transformed since the 1991 reforms. Prior to liberalisation, the economy was relatively closed, and downturns were often triggered by exogenous shocks such as weak monsoons or oil price spikes. Pandey et. all (2017) document that in the post-reform period, India now follows investment–inventory cycles similar to those observed in advanced economies. Using quarterly GDP data from 1996 to 2014 and the Christiano–Fitzgerald filter, they identify three distinct recessions: 1999 Q4 to 2003 Q1; 2007 Q2 to 2009 Q3; and 2011 Q2 to 2012 Q4. The data reveal a clear rhythm: the average post-reform expansion lasts 12 quarters (three years), while the average recession lasts nine quarters (2.25 years). As agriculture’s share of GDP fell from 51% in 1951 to under 14% by 2013, the economy moved away from weather-dependent cycles toward those driven by corporate investment and inventory dynamics.

In terms of volatility, Ghate et. all (2012) find that while cycles have become more persistent, macroeconomic volatility declined significantly after 1991. The economy no longer lurches between extremes. This greater stability reflects structural changes such as trade liberalisation and financial reform, rather than mere “good luck.”

They establish three stylised facts. First, investment now moves more closely with output, indicating that market signals play a larger role in capital allocation than in the pre-reform era. Second, India’s net exports switched from acyclical to countercyclical behaviour — a hallmark of more open and integrated economies. Third, although more stable than in the pre-1991 period, India’s volatility remains higher than that of mature industrial economies.

With this context, a key question arises: does credit drive the cycle, or does output? The research offers a nuanced answer. Garg and Sah (2024) argue that credit cycles often provide early signals of broader economic turning points. When banks lend freely, investment and GDP growth tend to follow. They highlight that India’s credit–investment–growth nexus has a distinct domestic rhythm, shaped more by local policy conditions than by global shocks.

In contrast, Saini et. all (2021) find that output growth tends to precede credit expansion — rising economic activity generates demand for loans. While credit is generally procyclical, they note that certain sectors (such as services) follow this trend more strictly than others. They also show that macroeconomic conditions influence the degree of synchronisation between credit and output. A higher repo rate and an appreciation of the real exchange rate are associated with weaker alignment between credit and GDP cycles. In contrast, an expansion in money supply and stronger output growth reinforce the credit–output link. These findings underscore the role of domestic policy and macroeconomic conditions in shaping the intensity of the credit–growth relationship.

Policy, Business Strategy, and Public Interpretation of Cycles

Taken together, this literature provides a coherent framework for interpreting today’s economy. The current gap between credit and deposit growth is not necessarily an anomaly; it reflects the business cycle operating through well-documented channels. For policymakers, monitoring credit conditions remains essential for anticipating turning points, though domestic shocks — such as the 2016 demonetisation or the NPA crisis — can disrupt cyclical patterns. For businesses, recognising that expansions typically last around three years offers a useful benchmark for planning capital expenditure and managing risk. For the public, a slowdown is often a phase rather than a structural crisis. Historical patterns suggest that periods of tightening are typically followed by renewed expansion.

Table of Contents

Understanding India’s Business Cycles: What the Research Tells Us

Post-1991 Reforms and the Transformation of India’s Business Cycle

Policy, Business Strategy, and Public Interpretation of Cycles

References:

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