There was a strange divergence between the economy and the markets last week. While the news about the economy kept getting better, the Sensex kept going lower.
More than four months after the first “green shoots” of recovery appeared in the Indian economy, everybody seems to be convinced we’re seeing a recovery.
Last week, the International Monetary Fund (IMF) raised its projections for India’s gross domestic product (GDP) growth by 0.9 percentage points both for 2009 and 2010. IMF now says India will grow 5.4% this year and 6.5% the next. The Index of Industrial Production (IIP) also saw a nice bounce, which too was forecast by the Purchasing Managers’ Index quite a few months ago.
That’s not all. Non-food bank credit increased significantly in the month to 26 June, a much better performance than the fall in credit in the previous one month.
True, credit growth compared with last year is still very low, but then nobody is arguing that the current GDP growth rate is near the growth rates notched up at this time last year. Also, we need to remember that oil companies had to borrow heavily last year.
This graphic shows the price-earnings multiples of different Asian nations. Graphics by Sandeep Bhatnagar / Mint
Yet another encouraging signal about the economy last week was provided by the OECD Composite Leading Indicator (CLI) for India, which came in at 96.7 for May, compared with 95.3 for April. The CLI for India has been improving steadily since February this year. The Organization for Economic Cooperation and Development (OECD) says the CLI indicates that the Indian economy is now in a “possible trough”, compared with the “slowdown” it was in earlier.
Which sectors are growing? Quite clearly, the economy is being held up by domestic demand, since exports aren’t doing well at all. It’s the consumer sector that’s supporting the economy, with consumer non-durables showing a year-on-year growth of 12.4% in May according to the IIP.
With so much excess capacity in manufacturing globally, it would be a brave entrepreneur who would risk expanding capacity at present. That’s why the capital goods index is still in negative territory. Of course, government spending on infrastructure should spur a recovery in capital goods, but it may take a while for that to happen.
The market, however, completely ignored all these encouraging signals from the economy last week. Instead it continued to fall, even after its nose-dive on the Budget day. The MSCI India Index has performed worse that the MSCI World Index this month, besides significantly underperforming the MSCI Emerging Market and Emerging Market Asia indices.