Despite soaring profits and a booming stock market, India’s economic recovery has not yet reached a self-sustaining phase
India’s corporate profits have shot up and share prices have rocketed but Asia’s third-largest economy is not out of the woods yet, analysts say.
In fact, the central Reserve Bank of India this week forecast just 6% growth for the current fiscal year, down from last year’s 6.7 % - the weakest since 2003. The forecast is also a percentage point below the government’s estimate.
India’s economic recovery has not yet “reached what might be termed a self-sustaining phase,” said HSBC economist Robert Prior-Wandesforde.
While 6% growth looks strong compared with the recession-hit US, Japan and Europe, India says it needs to return to the 9% pace logged before the global slump to cut deep poverty among its over 1.1bn people.
The biggest shadow has been cast by a below-normal monsoon, known as an “economic lifeline” in India, where just 40% of arable land is irrigated.
Citi economist Anushka Shah said her base case forecast of 6.8 % growth for the year to March 2010 “could moderate to 5.8 % or in a worse case to 5.2% levels, depending on the extent of (monsoon) damage.”
Agriculture accounts for nearly a fifth of gross domestic product and supports 60% of India’s still mainly rural population, driving demand for everything from TV sets to gold in rural areas.
Another long shadow over the emerging economic giant is falling exports in the face of the stubbornly persistent overseas downturn.
Exports slid for the eighth straight month in May, plunging 29 % to $11bn from a year earlier.
Exports account for around just 15% of GDP in India, where the economy remains relatively inward-looking, but their tumble has led to widespread unemployment in the garment, jewellery and other sectors.
Imports - a pointer to demand strength - have fared even worse, diving 39%.
Meanwhile, the government’s ability to boost the economy further on top of several stimulus packages has been held back by a ballooning deficit.
Still, amid this gloom, first-quarter profits have been better than expected with many companies beating market forecasts and share prices have soared.
India’s benchmark Sensex 30-share index has rallied more than 55 % this year to hit 15,300 levels, making it one of the world’s top performing markets, and analysts are eyeing 16,000-plus levels by year end.
Leading vehicle maker Tata Motors has reported a leap of nearly 60% in first-quarter net profit to Rs5.13bn ($105mn), driven partly by lower raw material costs and new models.
India’s number one mobile company by subscribers, Bharti Airtel, rang up a 24% net profit jump to Rs25.17bn ($526mn).
And all three of India’s top software service exporters defied the tough global conditions even with overseas sales growth slowing sharply.
The biggest, Tata Consultancy Services, for instance, said its quarterly net profit rose 18.8% to Rs15.33bn ($315mn).
Against this mixed backdrop, the RBI has chosen to tread carefully.
At a monetary policy meeting this week, the bank promised to keep the banking system flush with cash to help companies to invest while keeping interest rates on hold in the face of signs of resurgent inflation.
The bank said it hoped its 6% growth forecast will surprise on the “upside.” It is also banking that a slew of aggressive rate cuts announced earlier will lift the economy.
