Worst seems over; recovery not yet

Two days ago, we heard that India’s industries registered their sharpest fall in output in 15 years.

So why is a rising crescendo of voices saying we are now living through the end of the economic downturn?

Consider the indicators (see graphic) of an upturn in bellwether industries like cement and steel; the increased lending by banks to companies; and the stock rally in recent weeks.

The emerging consensus among economists, executives and government officials is that the economy may now be at its lowest point. But a firm recovery may take longer, depending on the global economy and election results at home.

“Until January nobody knew how bad it would get,” said Amitabh Chakraborty, president (Equities) of Religare Securities. “Now we are debating when will it get good.”

The transition from unbounded pessimism to cautious optimism could encourage companies to resume projects put on hold, hire more staff, and urge consumers — who have deferred house- and car-purchase plans — to restart spending.

“We are not going to see the precipitous drop in growth rates that other countries have seen,” said India’s Chief Statistician Pronab Sen.

Already top brokerage firms have revised profit forecasts for India Inc, saying these will decline slower than predicted.

Religare, for instance, expects net profit of the companies that make up the Bombay Stock Exchange's benchmark Sensex to drop 9 per cent. Its January forecast: A 15 per cent decline.

Chief Statistician Sen said he expects the economy to have grown at least 6.5 per cent in 2008-09. That rate, he said, could be sustained through this year and accelerate to 7-7.5 per cent next year, unless a split mandate creates political instability.

Foreign institutional investors (FIIs) agree with that view. After pulling out $13.1 billion (Rs 53,000 crore) in 2008 and another $1.7 billion (Rs 2,400 crore) in the first two months of this year, FIIs have bought about $1billion in Indian stocks over the past month. A stock rally has since taken the Sensex up by 32 per cent. Headhunters say fewer companies are planning job cuts.

"Vacancies are getting filled up, although there are no fresh hirings happening,” said Manish Sabharwal, chairman of Teamlease, a staffing company. The fear and uncertainty that set in after the dramatic collapse of investment banks like Lehman Brothers in September 2008 have mostly subsided.

What is helping India weather the global storm? The relative insulation of its rural economy and sustained demand in private consumption because of more than Rs 25,000 crore that government employees got in salary revision and another Rs 20,000 crore extra spending on rural employment programmes. “The big question is how quickly we get investment demand to revive and whether the demand in private consumption will sustain,” said Sen.

Significant risks remain though. Many companies have deferred expansion plans and new investments have slowed sharply. Unless that is reversed, a firm recovery could be elusive. So, the elections — and the weather — will be critical. The recent rains in northern India could affect the wheat crop in states like Punjab and Haryana, and undo the hope of a bumper Rabi (summer) crop. And if the monsoon turns erratic, all bets may be off: The rural economy, which has offered much cushion against the downturn in recent months, could then falter.