Reality check

Reality check
Business Standard, June 10, 2009, Page 9

The economic indicators still show a mixed picture

More and more people around the world are inclined to believe that the worst of the economic crisis is over, and that the signs of recovery are in the air. In India, the sense of optimism has been reinforced by the rather unexpected political outcome, which potentially frees the government of the many constraints it operated within during its previous term. Anticipation is building up about a breakthrough Budget, which will add momentum to the virtuous circle of evidence and expectations. However, before the book is closed on the meltdown, it would be prudent to do a reality check on the state of the economy, toting up the negative signals along with the positive.

On the positive side, the most visible indicator of a turnaround is the performance of the stock market over the past three months. The benchmark indices have risen by more than 80 per cent from their lows and, importantly, have not given up on their post-election spurt. Both domestic and global liquidity conditions are undoubtedly contributing to this, but underlying the sharp spurt is the view that the corporate earnings cycle too has bottomed out. The prospects of good economic policies being translated from paper into action also help.

Going beyond current expectations, there are some signs of real progress. The Purchasing Managers Index (PMI), which tracks the business cycle through data on procurement, has firmly crossed the dividing line between downturn and upturn. Two-wheeler sales are looking healthy, while some car manufacturers have also reported an increase in sales. Housing loan disbursements appear to be rising, suggesting a revival in this sector after developers have started offering reasonably priced options. Finally, the GDP data for the third and fourth quarters of 2008-09 suggested that not only were things not as bad as previously believed, they certainly weren’t getting any worse.

Against these, there are several indications on the flip side as well. While the Budget to be presented next month will reveal the government’s commitment to fiscal consolidation and reforms, the spreading resistance to disinvestment does not augur well on both fronts. If the government opts to present a politically expedient but economically weak Budget, expectations could spiral downwards as rapidly as they rose. Persistent fiscal pressures will keep interest rates higher than is consistent with a growth stimulus. Exports, which are amongst the country’s most labour-intensive activities, are declining sharply every month and will not stabilise until the affluent economies turn around. And, even if corporate earnings stabilise, companies are unlikely to have the appetite for any significant capacity expansion in the immediate future, which will affect growth.

When the positive and negative factors appear evenly poised, the economy’s vulnerability to new shocks should not be under-estimated. The monsoons may play a role though, at the moment, there is no particular cause for concern. Oil and other commodity prices are edging upwards, a development that could nip the incipient recovery in the bud. All in all, the best one can say is that the bottom has been tested, and that it could be a slow recovery in the initial phase.