Thursday, December 03, 2009

Are the green shoots here to stay?

Signs of recovery are looking good but structural bottlenecks and fall in agriculture threaten the sustenance of India’s economic growth, says Deepak Ranjan Patra

It may be very unconventional, non-scientific and inappropriate to judge India’s economic recovery in the following manner, but it certainly shows a difference. Just look for the news pieces that talk about companies bagging orders and you will find while there were almost none during the early part of this year, there is a flurry of such news over last couple of months. This clearly indicates that whether technically right or wrong, recovery has already made inroads into the minds of many. Erstwhile, Chairman of the Reserve Bank of India, Bimal Jalan, tells The Sunday Indian, “I do not see any big problem in India’s recovery. Investments are picking up, IPOs are once again visible and the signs are absolutely positive. Whether it is 5.5 per cent or 6.5 per cent, we are showing one of the highest growth rates in the world. So the recovery is also coming faster.”

Even Prime Minister Manmohan Singh has shown his optimism by stating, “There are clear signs of an upturn in the economy. Like other countries we resorted to a significant stimulus and we will take appropriate action next year to wind this down”, during the recently concluded India Economic Summit. What is interesting in his statement is the fact that here he almost gave a relative deadline for removal of stimulus indicating that the government thinks the economy will be back on track by 2010. But the question remains, are these alluring green shoots sustainable?

Going by the Index of Industrial Production (IIP), India has definitely moved a step away from the dire situation that it was in last year, if not recovered completely. IIP has grown a healthy 6.5% year-on-year (y-o-y) during April-September period of the current fiscal as against growth of mere 2.8% during financial year 2008-09. In the months of August and September, industrial production has clocked growth rates of 10.9% and 9.1% respectively, which by no means is a small achievement. But then it’s the reviving demand, especially in the urban areas, which is providing the required thrust. As per Nikhilesh Bhattacharyya, Associate Economist, Moody's, “Rebounding demand in urban centres, and inventory restocking have helped to support production, as has a recovery in external demand, led by emerging economies.” But then he attributes this rebound in demand to the fiscal stimulus provided by the government. That actually raises the question that what will happen when the government cuts back the stimulus packages?

In the meantime, while spurt in demand has made many happy, it has taken a few by surprise too. As per the latest data available with Society of Indian Automobile Manufacturers, in the month of October domestic sales of passenger vehicles have recorded a whopping 33% growth. While this has forced manufacturers to push production up, they are hold back by shortage of auto components. As per industry bodies, after a poor growth of 0.31% in car sales during FY08-09, many of the players had cut back their capacity and kept themselves prepared for a single-digit growth, but what came in their way is growth of over 20% in September and 30% in October. This completely caught the component manufacturers unprepared. Had they been prepared, the industry production of passenger vehicles could have grown better than 22%, which they achieved in October, 2009.

But it’s not only the auto sector that is looking resilient; the other sectors too are gaining ground. Bhavin Desai, Manager – Derivatives, Motilal Oswal Securities avers, “In Indian context second quarter numbers for many sectors viz. cement, banking, FMCG & pharma have been way ahead of expectation leading one to believe that we may be out of the woods.” Even the problem stuck aviation sector looks upbeat as Dinesh Keskar, President, Boeing India avers, “Despite the turmoil we still have a healthy backlog of 3,200 aircraft. Though we have witnessed limited order deferrals globally but our business in the Indian market hasn’t been affected much.” Impact of these positive outlooks is quite visible at the market place as Indian companies have started attracting the Foreign Institutional players (FIIs). The giant global investors, who withdrew their money from India during first 3 months of 2009, have been net buyers of over $7.5 billion during September and October. No doubt, these positive sentiments have allowed the Sensex to sustain at a high of around 17,000 despite the talks of a correction buzzing around.

However, this optimism is just one side of the coin. The other side, which is critical for the country’s real recovery, is still posing a threat. With more than 52% of the country’s work force dependent on agriculture, low farm output for the current fiscal is set to play spoilsport. Already the National Council of Applied Economic Research (NCAER) has lowered its growth forecast from 7.2 per cent to 6.9 per cent, stating, “The decline in the growth is a result of decline in agricultural output." NCAER has projected the agricultural GDP to decrease by 1.5 per cent. Expressing similar concerns, Sherman Chan, Economist, Moody’s avers, “India’s battle against downside risks is far from over… agricultural output is bound to tumble in coming months.

As the primary industry is hurt, the rest of the production chain will experience the flow-on effects. For instance, a sharp decline in farm output is expected to reduce demand for transport and storage services, and the supply for exports could also plummet.”

For Complete IIPM Article, Click on IIPM Article

Source :
IIPM Editorial, 2009

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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