If all goes well, economy bottom likely around June

Has the Indian economy already seen off its worse phase?

Economists certainly think so. Predictions are that Indian economic growth will ‘bottom out’ in the second quarter of 2009 (April-June) as consumer confidence returns and monetary and fiscal stimulus packages start having an impact.

Japanese company Nomura Securities predicts that economic activity will pick up in the July-September quarter of 2009. Its composite leading index (CLI), which predicts economic activity two quarters in advance, rose in January-March after four consecutive falls, indicating that economic activity is reviving.

Sonal Varma, India economist at Nomura, says macro parameters point towards a turning point in growth. “It (CLI) includes seven leading non agriculture parameters from the industry and services. All these are clubbed together in one index with which the correlation of GDP growth is the highest,” she said.

However, the economy is unlikely to bounce back with a bang. Growth will continue to be sluggish in the first six months of 2009. Nomura predicts 4.5% growth in the April-June quarter of 2009 as companies go slow on production and output in the services sector declines.

Other economists also agree that India may turn the corner at the end of the current quarter. Surjit Bhalla, economist and chairman at Delhi-based Oxus Investments, said, “China has bottomed out in October-December and India will probably bottom out in January-March”.

Bhalla suspects the economy did its worse in the October-December quarter, with only a miniscule 1% growth, while January-March clocked just 3-4%. He expects 6.5% growth in the April-June quarter, with the economy probably getting back to a strong 7-8% growth in the quarter to December 2009.

Economists are watching the industrial production numbers together with domestic credit and international markets. 

Only an unexpected worsening of global growth could spoil the party for India, they said.

Dharmakirti Joshi, principal economist with Crisil, says the effects of monetary and fiscal stimulus will also kick in post June, helping growth.

Reserve Bank of India has cut interest rates five times since October. The last time on March 4, RBI cut the repo (the rate at which banks borrow funds from the RBI) and reverse repo (rate at which banks park surplus funds) by 50 basis points each.

“Industry numbers will also be good in 2009 because it will come on a lower base of 2008. Construction and auto sectors will get a kick but only the export situation might not improve much. But it is not that we will suddenly start growing at a high rate. Recovery will be sluggish,” he said.

Anubhuti Sahay, associate economist, Standard Chartered Bank, said the problem in India is more about confidence. “Six months down the line, when the uncertainty goes away, especially in the private sector, consumer spending could pick up which will lead to an increase in investment demand by companies,” she said.

Economists said the signs for a pick up will be when companies start investing. Hence, individual numbers in the industrial production figures like basic goods (iron ore), intermediate goods (things made of iron like nut bolts) and capital goods (where iron and other components are used to make things like trucks) are also under watch.
Deepali Bhargava, economist at ING Vysya Bank, said there is still some pain to come especially in the services sector as job losses and pay cuts in the sector are still showing up.