Economists sight ‘green shoots’

After a long and dismal winter, economists with leading financial institutions say the “green shoots” of a recovery can be sighted in India, and that the engines of the economy will start humming again from the middle of 2009.

“The largely domestically driven Indian economy will begin to recover palpably from mid-year,” says Macquarie Securities economist Rajeev Malik. “The double-cylinder fiscal and monetary response has been aggressive and is already paying dividend.”

UBS economist Philip Wyatt too points to “a strong likelihood of an upturn” in industrial activity by June 2009. His base-case scenario is for the Indian economy and corporate earnings to bottom out by the second half of 2009-10 and for full recovery in 2010-11.

Wyatt pegs his outlook to a “significant rebound” in a forward-looking Indian economic indicator compiled by the Swiss bank: the proprietary lead economic indicator (LEI), which tracks (among other variables) government bond yields, M1 money supply, currency risk premium, foreign exchange reserves and stock market gains, has gone from a record low of -2.08 in December 2008 to +2.1 in March 2009.

Since the LEI leads by about five months and “turned around” in February, this implies that industrial recovery will be in progress by July. “We are now much more confident of a turning point in the industrial cycle by June 2009,” says Wyatt. Moreover, he expects the recovery to be sustainable “because there is a low degree of excess capacity and levels of private sector indebtedness and non-performing loans are moderate.”

The decline in India’s index of industrial production has been significantly less than in other Asian economies, and is probably nearing its end, reckons Malik. Although India’s structurally broad industrial base suggests that industrial production will need a bit more time for the year-on-year growth rates to be firmly in the black, “we are gradually getting there”, he says.

The RBI too appears to be approaching the end of the policy rate-cutting cycle, but banks have “more room to cut their lending rates more aggressively, which in turn should boost economic activity.” The broader setting, he says, “is evolving nicely to position the economy” for a better second half of FY 2009-10, although political uncertainty over the outcome of the general elections “remains a legitimate concern.”

In Wyatt’s estimation, when leading economic indicators turn upwards, as India’s LEI has, cyclical stocks tend to outperform defensive stocks in anticipation of an upcoming recovery. “So we are positive on the Indian stock market on a 12-month view with overweight recommendations for autos, metals, banks, real estate and conglomerates.” Pointing out that foreign institutional investors too have been switching from defensives to cyclical, Wyatt adds that with FII inflow expected to increase, “we could see more money flowing into cyclical sector companies in the near future.”