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India’s Economy — On The Road to Recovery?

06 May, 2009

India’s economy, which has been hit harder than expected by the global recession, may be on the path to recovery, some recent data suggests.

Asia’s third-largest economy is expected to have grown less than 7 percent in 2008/09, sharply lower than the expansion of 9 percent or in each of the previous three fiscal years, and is poised to expand at the same pace in the fiscal year ending March 2010.

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.

The following looks at the growth outlook for the South Asian economy and the pace of its economic recovery.


A slew of data in recent weeks has shown that a tentative recovery is taking shape. The ABN AMRO Bank purchasing managers’ index (PMI) based on a survey of 500 companies, rose to 53.3 in April from March’s 49.5, climbing above the threshold of 50 that separates expansion from contraction.

This was the first expansion in factory output in five months and showed demand in the economy is returning.

Data also signalled 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, consumer goods sales have seen strong support from rural markets, while auto demand has firmed after a disastrous December quarter.

Wholesale price inflation shows demand has not fallen as anticipated and prices were holding firm.

Industrial output, which accounts for nearly a quarter of India’s gross domestic product, has shown signs of revival after a dismal March quarter. January’s initially reported fall was revised to a rise of 0.4 percent.

Economists said stimulus packages announced by the government since late last year, along with aggressive policy easing by the central bank, look to be making an impact given improved car sales and uptrend in cement and steel demand.

They also say robust performance of consumer goods and capital goods, a key barometer of activity, in the February industrial output report showed that there is demand.

Analyst say savings and investment rates, which have reached close to 40 percent due to the structural changes in the economy, would enable it to sustain an investment rate of 35 percent despite lower capital inflows.

The main stock index has rebounded more than half from its 2009 trough in early March. Foreigners bought $1.5 billion worth of shares in April and another $296 million on Monday, after heavy outflows in January and February.


Domestic ratings agency ICRA says 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 and as government stimulus starts feeding into the broader economy.

The central bank has forecast 6 percent expansion in Asia’s third-largest economy but private analysts have pegged growth lower than that. Any growth below 6 percent would increase unemployment.


Rajeev Malik, economist with Macquarie Securities says the largely domestically driven economy will begin to recover palpably from mid-year onwards. “The double-cyclinder fiscal and monetary response has been aggressive and already paying dividends.”

Investment bank UBS said in a research note that its lead economic indicator had climbed for three months in a row which signalled a strong likelihood of an upturn in industrial activity by June.

Robert Prior-Wandesforde, economist at HSBC, wrote in a research report that there were a number of reasons to be positive about India’s growth prospects.

“Individually, none of them are hugely powerful, but collectively they should drive a recovery later this year which is likely to gain momentum in 2010.”


There is still some data which shows that the global slowdown has taken a heavy toll. Exports declined by a third in March to $11.5 billion, its sixth straight monthly fall and economists say the global economic slump would further dent Indian firms’ foreign sales in the months ahead.

Consumer prices still remain elevated and the Reserve Bank of India said inflation based on various consumer price indices continues to be near double digits, reflecting a firm trend in food prices.


Political uncertainty remains a short-term risk.

Emergence of a weak coalition could lead to policy limbo, which in turn may hurt the economy.

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.

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India’s Economy — On The Road to Recovery?

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