Myth & Reality : Rainforest, not greenshoots

This is an interview given to The Week magazine with reference to the indicators of a sustainable economic revival in the country.

November 29, 2009 11:04 IST | India Infoline News Service
The performance of stock markets across the globe suggests that the global economy is in a strong recovery phase. Global trade has had a healthy rebound, industrial activity indicates revival, asset prices are reflating and corporate earning estimates are being upgraded. However, as compared to the developed nations, most emerging markets have seen a faster revival in macroeconomic indicators.

India's IIP growth has recovered to 10 per cent, exports traffic growth is back in positive territory after a gap of six months, auto sales are running at 15-20 per cent y-o-y and the broader consumption momentum, notwith standing sub-normal monsoons and floods in some parts of India, remains buoyant. Earning upgrades have also been primarily led by the consumption-linked sectors, apart from IT. Even corporate tax collections have been higher than expectations, which indicates an improvement in corporate earnings.

The way markets have responded indicates that we are not seeing greenshoots of revival but a tropical rainforest. Large capital inflows are a fairly clear indicator of waning risk aversion. The FII net buying of equities till date ($14 billion) has already exceeded the net selling of equities in 2008 ($13 billion), Indian companies have already raised around $17 billion of risk capital and even FDI inflows have been consistent.

The recent announcements in the RBI's mid-year policy review have given clear indications that the focus has shifted back from growth to controlling inflation. While the RBI has raised its year end WPI projection to 6.5 per cent, the GDP growth estimates continue to remain at 6 per cent, however, with an upward bias. A hike in SLR, some tightening of lending norms and hike in inflation expectation sent a clear message that the soft stands taken during the economic upheaval will no longer be available. Two quarters down, the pertinent question is, are these indicators enough proof of a sustainable economical revival? No surprises in the form of major changes in the interest rates are expected until March 2010. So, the investment cycle is expected to continue.

With the announcement that the US economy is back on the growth track, it looks like things are getting back to normal. India has weathered the storm better than the rest of the world given its huge domestic market and stage of capex cycle. Other than the buoyant IIP numbers, railway freight growth in double digits in August, growth numbers in sectors like cement and auto are back to confident levels. Real estate companies are seeing a strong growth in sales and prices, too, are stabilising. Even if we factor in the impact of a bad monsoon, it has been negated by the government's rural spending. By historical evidence, there could be a bounce-back in agriculture in 2011, which is typical of the year following a drought.

Sustaining the growth in GDP would be a function of various factors. Investments in infrastructure will provide further impetus to growth. Secondly, India has largely been a consumption-led economy and the past few years of unprecedented growth have been supported by domestic consumption. Thirdly, India continues to remain a prime investment destination, especially in the light of its continuing growth. With all the good news flowing, the GDP estimates for financial year 2011 at a 7-8 per cent are fairly reasonable. By virtue of its emerging value, and the sheer wealth of opportunities for global investment across verticals, India would actually be in a sweet spot of sorts. We seem well poised to outperform the world in the years to come.

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