What does the Economic Survey have to say about the markets? Forget about all those pie-in-the-sky medium and long-term reforms, what does it say about the immediate outlook?
It says it’s debatable whether the recent rise in stock prices is on account of the celebrated “green shoots” or “a result of position taking by financial investors, seeking to benefit from global recovery expectations due to large fiscal and monetary stimulus and/or to hedge against inflation risk in the US due to massive quantitative easing.”
It then points to the fact that crude oil and commodity prices have risen in spite of piled-up inventories and to the very rapid rise in commodity prices as proof that speculators have been at work.
So the rally isn’t justified by the fundamentals? The survey also says, “There are positive signs that the Indian industry may have weathered the most severe part of the shock and is now moving towards a recovery.”
It mentions higher electricity generation, the improvement of cement despatches and rise in the offtake of bank credit as reasons. At the same time, it says that we’re not yet out of the woods: “The uncertainty surrounding the macroeconomic developments world over in 2009-10 and the need for minimizing the second round impact of the global shock call for a continued fiscal policy stimuli.”
It worries over the sharp dip in the growth rate of private consumption and in the slowdown in the rate of gross capital formation, which it says “is an area of policy concern from the point of an early return to the high GDP (gross domestic product) growth path.” And it’s positive that export growth is not going to pick up in a hurry. In short, what the survey is saying is that the recovery calls for more fiscal and policy action.
What else is needed for growth to get back on track? The survey doesn’t subscribe to the decoupling theory, because it says the speed of the recovery is linked to the revival of the global economy, in particular the US economy. Here’s its detailed prognosis: “If the US economy bottoms out by September 2009, there could be good possibility for the Indian economy repeating its 2008-09 performance, i.e. around 7.0 +/- 0.5% in fiscal 2009-10 (assuming a normal monsoon). The pattern of fiscal 2008-09 may be repeated in that case, though in an inverse sequence, with two not-so-good quarters followed by two good quarters making a “U”-shaped revival of the growth path. However, in the event of a more prolonged external economic downturn, with revival of the global economy/US economy being delayed until early 2010, the growth may moderate to the lower end of the range.”
The survey also points out that the Indian economy is far better placed to weather the global storm compared with most other countries and this “makes Indian industry one of the few attractive destinations for investment”. Shouldn’t that lead to more money coming to our markets? Here’s the rub: the report points out that the “medium- to long-term capital flows are likely to be lower as long as the deleveraging process continues.”
One last important point: How accurate are the Economic Survey’s predictions? This is what the survey said in February last year: “In the short term, expectation of higher relative returns from investment in India, favourable risk perception of investors and improved global liquidity would help the country in being an attractive destination for investment. Going forward, despite the possible subdued global growth, the strong fundamentals of the Indian economy in tandem with higher growth would help in sustaining the interest of domestic and foreign investors in the Indian market.” We all know what really happened last year.
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