A reality check on the 'Indian Economy'

The unprecedented euphoria on our stock markets in the aftermath of UPA victory was quite unexpected. The rise in the markets on Monday can be attributed to excess liquidity in the system and partly to the short covering by operators. The big question is whether Indian economy is out of the woods? From now on the markets will tend to reflect the economic data which will be released in the coming days. The important events to be watched are: Release of GDP figures for the 4th quarter and FY 08-09 on 29th May (estimates vary between 5-7% for FY 08-09); The figures for the fiscal deficit for FY 08-09 are also significant. The US Federal Reserve has painted a gloomy picture for US recovery in the near future. The pending bankruptcy of US auto major General Motors may give a jolt to the US economy.

Let us gaze at the 'Crystal ball' to analyse the prospects of Indian economy. On the negative side, Moody's in their recent research report have said: “The positive sentiment is expected to be short-lived, as India essentially only started feeling the pinch of the global downturn in the December quarter and the worst is yet to come.” For the year 2009, India’s growth rate is unlikely to exceed 5%, but a recovery in the opening quarter of 2010 due to expected rebound of the US economy in the December quarter, should lift annual expansion to about 5% for fiscal 2009-2010, it said. On the positive side, CMIE expects India's GDP to grow at a healthy 6.6% in 2009-10. It also expects PAT of corporate India to grow at 77% during 2009-10, based on the assumption of oil sector reforms leading to a drastic cut in oil subsidy bill.

A number of leading indicators, such as increase in hiring, freight movement at major ports and encouraging data from a number of key manufacturing segments, such as steel and cement, indicate that the downturn has bottomed out and highlight the Indian economy's resilience. The investor sentiment has improved significantly and FII's have turned aggressive buyers on the Indian bourses. As long as the US $ continues to slip against the Rupee, FII activity will continue unabated. The next phase of growth is expected to come from rural markets with rural India accounting for almost half of the domestic retail market, valued over US$ 300 billion. Rural India is set to witness an economic boom.

Considering the above scenario, Indian stock market scenario has changed from 'Sell on every rise' to 'Buy on every decline'. However, small investors are advised to exercise abundant caution in the ensuing volatility on the markets.