India’s industrial slowdown is surely past its worst, but the road to recovery is going to be bumpy, said experts.
“After months of sobering news, the data flow finally seems to be turning constructive. What gives this credence is that a number of co-incidental variables — PMI, exports, industrial production, auto production — seem to be simultaneously suggesting that industrial activity has bottomed out and is possibly on an upswing,” JP Morgan economists Sajjid Chinoy and Jahangir Aziz said in a note.
October’s purchasing managers’ index (PMI) showed marginal improvement at 52.9, from September’s 10-month low of 52.8, mainly driven by new order inflow.
Economists said industrial activity was looking up with the new reforms initiated by the finance minister. However, recovery will only happen once investments pick up, something which has long been hampered by project approval delays and high bank interest rates.
There is no clear growth recovery in sight, according to economists at Nomura India.
“As such, demand remains subdued and supply-side bottlenecks, especially power shortages, remain a constraint,” said Nomura economists Sonal Varma and Aman Mohunta.
If the government succeeds in implementing planned measures such as setting up a National Investment Board, passing the land acquisition Bill, and goading the cash-rich public sector enterprises to invest, there are more chances of an industrial recovery over the next few months.
“Cyclical hurdles, the investment uptick in the manufacturing sector requires corporate sector margins or return on equity to improve. Corporate returns on equity have declined 10 percentage points over the last five years to a low of 15-16% and have likely bottomed out,” said Mahesh Nandurkar and Bhavesh Pravin Shah, analysts with CLSA Asia-Pacific Markets.
Meanwhile, services expanded at the slowest pace in six months in October. The services PMI weighed in at 53.8, below September’s 55.8.
Looking ahead, growth is likely to remain moderate as supply constraints continue to act as a break on growth while keeping underlying inflation pressures simmering, which will keep RBI hesitant about easing, said Leif Eskesen, chief economist for India & Asean at HSBC.
Global economic turbulence has also impacted Indian industrial growth to a great extent with slow growth in the United States and uncertainty in the euro zone playing a spoilsport. But things seem to be turning increasingly positive.
“Exports will provide some uptick to industrial activity. There are increasing signs that the global economic environment is beginning to look up a little bit,” said Saugata Bhattacharya, chief economist at Axis Bank. “The Europe situation is no longer as critical and the United States seems to be recovering. Economic activity has bottomed out in the developed markets.”