Monday, May 25, 2009


Despite political uncertainty Indian economy is in the path of recovery from the recession. The engine for this growth is not IT sector but traditional basic sector of Steel and cement. A sudden robust performance of consumer and capital goods, a key barometer of activity, showed that there is generation of demand in the country. In view of above activities the Government India is insisting on world bodies like IMF to have greater shares of say in conducting the affairs of the IMF and the World Bank. If India’s political climate turns stable there is a strong possibility for her to don an aggressive new role in world bodies soon. The short-term outlook for the economy has improved significantly. But there is a glaring lack of faith in the longer term. The fall in March index of Industrial production is a pointer in this regards.
The recent data made available to us revealed that demand in India's hinterland is firm and is supporting a vast expanse of the economy. Cement sales have grown at near double-digit rates since November. The consumer goods sales have seen strong support from rural markets. While auto demand has firmed up recently after a disastrous December quarter. Most of the auto companies are bringing up new models of cars including European manufactures like Fiat, Volkswagen and Mercedes .The cement prices have gone up on increased demand from May. Some analysts say the robust growth in steel and cement sales as well as in manufacturing in recent months showed the worst maybe over for the economy. However it is still a matter of debate.
Wholesale price inflation shows demand has not fallen as anticipated and prices were holding firm. Despite such firm signal for growth the unemployment may not go down as the younger population is growing every year. The traditional industries have not been great employers. The generation of employment was faster in IT sector, garment sector, gems and jewelry sectors beside service sector which are yet to grow at a desired level. After a very poor march quarter, industrial output, which accounts for nearly a quarter of India's gross domestic product, has shown signs of recovery.
A few economists, of late, felt that stimulus packages brought in by the government since late last year, along with aggressive policy easing by the central bank, appears to be making an impact, given improved car sales and uptrend in cement and steel demand.
It is worth noting that savings and investment rates, which have reached close to 40 percent due to the structural changes in the economy. This would be able to sustain an investment rate of 35 percent. During the recent month it became clear that NRI are sending more money than before and so the foreign exchange reserves may slowly improve. This fact was revealed by none other than State Bank of India on 8th June.
The main stock index has gone up by more than 40% from its low of early March. FII bought $1.5 billion worth of shares in April and another $296 million recently, after heavy outflows in January and February. However my views are that the sensitive index is still not stable and share market may go further down. My gut feeling is that index may go further down to around 10,000 levels or below should political stability keeps slipping in coming days. Investors should be ready to accept the opportunity for long term investment.
According to well known ratings agency ICRA, the economy is likely to grow 6.5 to 7.5 percent in 2009/10 if the global economy comes out of the slump later this year. But according us the growth rate may not come up soon. We had forecast earlier that Indian’s growth would remain below 6.5% during the year. We stand by our forecast as government stimulus would take time to affect the broader economy of the country. However there is a strong possibility that by 2010 Indian economy would recover at a faster speed. We strongly feel that the high fiscal deficit of central and state governments, which according to some observers has reached nearly 10 percent of gross domestic product, could prove to be an obstacle to growth and undermine the Reserve Bank's aggressive rate cuts. Yet there is a silver lining in the sky. Monsoon is expected to be normal that might trigger better growth and possibilities of lower unemployment.

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