Worst may be over

Worst may be over
Economic Times, May 15, 2009, Page 12

But A Decisive Upturn Still Not In Sight

THE worst may be behind for the Indian economy, reveals an ET poll of heads of India’s leading companies (ET, May 14). The majority verdict comes even as some of the recent macroeconomic data, read exports and industrial growth, make for dismal reading. The recent stock market rally has had a large part to play in this improvement in sentiment. Equity, which had lost currency, is suddenly back in business, making it easier for cash starved companies to raise funds. Promoters of real estate major DLF, for instance, recently managed to raise nearly Rs 4,000 crore through a 9.9% stake sale. A couple of weeks ago Unitech had raised over Rs 1,600 crore through institutional placement. Admission of pick up in auto and home loans by some big banks has also helped. However, it is important to appreciate that though the economy may have bottomed out, it does not necessarily mean that there would be a quick recovery. Indeed, many CEOs in the 31 company survey — all sensex constituents except IT, Steel Authority of India and Hero Honda — were of the view that though the worst of the slowdown was behind us, they still did not see any immediate signs of recovery. So, the risk that the economy continues to trundle along near the bottom remains, though it is unlikely to immediately slip further from the current levels. And the longer the economy takes to recover, greater the chances of some adverse developments causing serious harm and prolonging the sluggishness.

The expected sluggishness in the OECD economies remains a worry. But the bigger worry is the post-election uncertainty and the formulation of the next government. While consumption demand may improve as fears recede, investments, the big driver of the economy in recent years, will not pick up in an uncertain political situation. The biggest challenge for the next government is to find ways to spur growth while ensuring that the large government borrowing does not deny funds to industry. Walking this tightrope will be difficult for a patchwork government. Political risk has never been so high for the Indian economy.