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Signs of a recovery?

While industrial output figures are grim, growth across some sectors suggests that the worst may be over.

twitter-logo Anand Adhikari        Print Edition: May 3, 2009

Could the economic slowdown in India have finally turned a corner? According to a generally-accepted rule of thumb, an economy supposedly revives six to nine months after the stock market in that country bottoms out. This happened on March 9 this year when the Sensex reached 8,160 points—but has since risen by over 30 per cent to 10,800, fuelling hopes that a rebound is around the corner.

However, this sort of “rule of thumb” analysis wilts in the face of solid numbers. And recently released numbers for industrial production are grim enough to put deep frowns on the faces of even the most die-hard optimists. Industrial output fell at its fastest annualised rate in 14 years, shrinking 1.2 per cent in February compared to a robust 9.5 per cent growth for the same period last year. So did manufacturing, which contracted by 1.4 per cent in February.

Still, despite all the gloom, a few silver linings amid these clouds of economic uncertainty stand out. Yashika Singh, Head of Economic Analysis, Dun & Bradstreet India, believes that the negative growth of 1.2 per cent could, in some part, be attributed to a high base effect, which makes these numbers look worse than they actually are. Also, “there are encouraging growth numbers across sectors such as FMCG, cement, telecom, retail, steel and auto,” says Ajay Srinivasan, Chief Executive, Financial Services, Aditya Birla Group.

Others, like V. Vaidyanathan, Executive Director at ICICI Bank, think that “a good part of the liquidity has now seeped into the system and is resurfacing in the form of purchase of goods and services.”

A glance at growth numbers across core sectors seems to echo these views. The FMCG sector, for instance, has been registering robust growth with most categories growing between 8 and 25 per cent. ICICI Bank has actually seen an upward movement in heavy commercial vehicle sales for the first three months of 2009, from 7,000 units in January, to 15,000 for March. “I consider commercial vehicles as a lightning rod of what’s happening in the economy, and seen in this light, this must be read as good news for the economy,” observes Vaidyanathan.

Similarly, ICICI Bank says that the auto industry is also in the midst of a recovery. March 2009 saw 1,59,000 cars being produced— only a 2 per cent growth over the same period last year. While this is not a large number, the bank says that sequential growth across the months reveals a more accurate picture: While average sales for the quarter ending March ’09 were 1,42,000, those for quarter ending December ’08 were 1,00,000— reflecting a sizable 42 per cent increase. “No doubt, fiscal stimulus has played a role, with excise benefits and accelerated depreciation. But confidence, too, could be lifting, or else people wouldn’t buy cars,” reasons Vaidyanathan.

This rise in consumption is a good sign, say experts, as it helps companies in drawing down their inventory levels. “The higher levels had earlier resulted in production cuts,” says Sonal Verma, Economist at Nomura Securities. Companies can now have the advantage of building fresh inventory while taking advantage of input costs that are substantially lower than before. This is especially welcome for the beleaguered construction sector, which now has to deal with much cheaper steel and cement.

So, if this isn’t a bona fide recovery, is there one lurking in the not-so-distant future? Experts believe that a further easing of monetary policy and rising infrastructure spending will be good catalysts for a rebound. “The pessimism seems to have been overdone in India,” says Srinivasan. Another gauge to judge a recovery by: Capital expenditure spends by corporates which will indicate a buildup of corporate confidence.

Clearly, the Indian economy is far from being out of the woods. However, if these sectoral growth trends are anything to go by, there might just be a glimmer of hope that the worst is behind us.

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