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• The economy has bottomed in India and internationally
• Expect a very slow turnaround from now but numbers look bad till Q3 ‘09
• Manufacturing recovery in India commences
• Stock markets rally as if worst is over – but too bullish for our liking
• G20 meet says the right things, adds value to the IMF
• Inflation under wholesale prices falls dramatically; consumer price inflation to follow in coming months
• Rural markets holding up so far in India, need support from weather going forward.
India: Kal, aaj aur kal
India was taken back by shock last September, as it was hit by the global crisis and events proved the decoupling hypothesis wrong. While the pendulum swung immediately in the other direction and capital pulled out, exports shrunk, the capital account went into a deficit for the first time since 1998-99, just about as suddenly, the situation appears to be changing. Words like ‘green shoots’, ‘end of fear’, etc. have begun to come back on the scene even as manufacturers begin to look less shell-shocked as before, the stock market rallies and the rupee gains strength. Some hard numbers to support this reversal in sentiment - the JP Morgan Global PMI indices(reference given below), show that Indian manufacturing has contracted the least and has swung back the fastest to touch a 49.5 index in March. Of course, it will take another few months to show a clear trend but the bottoming off seems to have happened. This only supports our assertion that low or falling prices after a bubble are a signal of rationally functioning markets and therefore good for the economy.
This of course does not in any way mean that all production numbers will just as suddenly turn positive or double digit – they will still look bleak for another quarter or so. What has happened is that just as a while back, things were looking worse than expected, now they are looking better than the worst. It is all relative of course, but the fear pychosis seems to have gone.
There are still so many problems to overcome – the fiscal deficit is just one of them. Borrowings are slated to go up even further, and though the RBI Governor has asked markets not to be ‘unduly worried’, it is difficult to see how markets can take this in their stride serenely. While some banks have reduced their rates and it looks now like an all out public vs private sector bank fight on this one, the RBI rate cuts are not being passed on sufficiently. This, by the way, is not a problem unique to India and its banking system - Australia, Indonesia, Israel all report reluctance from the banking system to pass on the cuts.
Credit growth has also significantly reduced as the economy slumped, and this has hit firms very hard. Risk aversion is of higher priority in bank portfolios now, the days of easy credit are over, companies need to realign their plans in these new conditions – the period of ‘painful adjustment’ is on. And for some, specially the small and medium sector, and more so those that were expanding aggressively, there will be very painful times ahead.
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