Indian Economy is not in 'Recession'

The worst fears have come true: India's IIP numbers for October '08 have turned out to be a negative 0.4%. IIP numbers are likely to stagnate for the month of November '08 also, putting pressure on the earnings growth of Indian corporate sector for quarter ending December '08. These may seem like dark clouds on the horizon. Does this mean that Indian economy is moving towards recession? The answer is an emphatic 'NO'.

Let us try to focus on the silver lining amidst the dark clouds to find an answer:

• Inflation has moderated to reasonable levels, and is likely to decline further to below RBI's benchmark level of 5% in a few weeks time. The prices of food articles have also seen a decline in the past week. Crude oil prices, which accounted for a major portion of India's woes, have corrected substantially, and despite OPEC's call to cut production are not threatening to cut loose any time soon.
• Interest rate cycle has peaked and we can hope to see drastic cuts in interest rates by the banks in the next few weeks. A further rate cut on REPO front by RBI may be expected towards the end of December. Demand will see a revival after the excise cuts announced by the govt. All this augers well for Corporate India, as the much needed money will be available at reasonable price to sustain growth projects.
• FII outflow from Indian markets may be coming to an end. The signs are evident with the Rupee stabilising against the dolllar. India may benefit when overseas fund allocations are made for emerging markets at the beginning of 2009. As liquidity position eases in world markets, India will emerge as one of the preferred destinations for 2009, because the Indian economy continues to be one of the fastest growing economies amidst the global turmoil.
• The mood of the people is quite upbeat, and more importantly the country stands more united to fight external threats. However, the political instability ahead of general elections may have a subdued effect on the markets in the short term. The slowdown in earnings also threatens towards one more leg of downward move on our stock market, but the base building exercise thereafter will lay the foundations of a strong upmove post May-June 2009, that is after the new Govt. takes charge at the centre.

The negative growth in IIP numbers may have been caused by the severe liquidity crunch faced by the industry in October '08. The situation has improved since then, and the positive factors discussed above should lead to a rebound in the last quarter of this fiscal. An economy growing at 6-6.5% in the worst case scenario, cannot be classified as an economy in recession.