Let the Champagne Wait

The Indian economy’s recovery is ahead-of-the-curve but also fragile. Should the government, then, even consider withdrawing the stimulus package?

January 2008. As it snowed fero­ciously in the Swiss hill town of Davos, global leaders gathered at the World Economic Forum’s Annual Meeting to contemplate whether, in the event of a fierce economic slow­down, India—together with China—would be the only exceptions, not buckling under the im­pact of a worldwide contraction.

What followed was economic turmoil of un­precedented proportions, sending financial markets and global trade in a tailspin. It’s not as if India didn’t feel the pinch. Indian compa­nies went back to the drawing boards to rework plans, projects were shelved, the capital mar­kets went into a free fall, jobs were lost and the country’s growth trajectory took a body blow.

Cut to November 2009. Several monetary and fiscal stimuli later, the economy is showing signs of returning to a smoother growth path and, in its October policy review, the Reserve Bank of India (RBI) has, for the first time since the crisis, openly spoken of gradually disengaging from its earlier policy of monetary accommoda­tion. Is it then time to switch off the fog-lights?

Consider the facts. The latest Index of Industrial Production (IIP) figures show a sturdy 9.1 per cent growth, well past Street expectations of around 7 per cent. The good news is, while the consumer goods sector has been growing for the past few months, this latest growth in IIP has seen the return of the capital goods sector, which turned in better-than-expected numbers.

Now let’s take a look at the second quarter per­formance of Indian companies. Most analysts agree that largely, the earnings performance has been in line with expectations. While a few large-cap companies have disappointed, the results were generally robust. Significantly, the automo­biles, fast-moving consumer goods, pharma and banking sectors have seen healthy profit growth.

This is cause for cheer. But more important­ly, a distinct change is now visible in corporate mindsets. Big companies like Reliance and Essar are back scouting for mega acquisitions, negoti­ating with LyondellBasell and Shell respective­ly to firm up deals, and even mid-cap companies are now talking of purchasing other companies ‘if the price is right’. The price, as we all know, is likely to be right at some point, since globally, tar­get companies have become far cheaper than the time when, say, Tata Steel acquired Corus.

The changing economic climate seems to have bolstered the Government’s confidence, and big-ticket disinvestment, anathema till recently, is back on its agenda. Ostensibly, as much as Rs 60,000 crore is being sought to be raised by way of sale of small stakes in profitable public sector units, a laudable step that will ease the burden on the fisc and channel monies to social sector projects. From the capital market’s perspective, this can only be a good thing for bourses perenni­ally hungry for quality offerings.

But if I have led you to a feel-good zone, let me hurriedly put forward the flip side. The second quarter results have shown that while toplines remained by and large flat, bottomlines of com­panies showed robust growth. This is because, as commodity prices fell, impacting input costs, companies saw flattish sales growth but margins were strong. But then, inflation clouds are once again gathering on the horizon. So, input costs are bound to rise and since demand isn’t picking up adequately yet, output costs may not be able to keep pace, pressuring margins.

On the markets front, there are some concerns too. While a 15 per cent correction in the Bombay Stock Exchange Sensex at any given point seems to have been factored in by analysts, the gradu­al return of bullishness is also leading to a build-up of initial public offers, including several from the tricky real estate sector. If the pricing of these isn’t right, we could again see burnt fingers.

A 6-6.5 per cent growth rate for 2009-10 is now a distinct possibility, given the dynamics I men­tioned. But equally, policymakers, financial mar­kets and the corporate sector will have to contin­ue to keep a watchful eye on the several variables before betting on the fact that the worst is over.

So the debate in government and RBI circles re­volves around that one critical question: should the Government withdraw the stimulus packag­es, or should it wait some more to see if the econ­omy can stand on its feet once again? It is the tim­ing of this call that will determine how soon India returns to a stronger growth trajectory.

(These are the author’s personal views)

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