Of late, probably inspired by the return of foreign institutional investors’ money to our shores, some analysts have been betting that the Indian economy would see a rebound, perhaps in the second half of fiscal 2011 (FY11). India, as the headline of a research note by Nomura Holdings Inc. puts it, is seeing a mid-cycle slowdown, to be followed by a rebound. A research note by Citigroupeconomists Rohini Malkani and Anushka Shah points out the reasons for the optimism: a likely rise in consumption due to wage increases, higher exports and “the possibility of an upturn in investments in 2HFY12 (second half of FY12)".

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Unfortunately, the International Monetary Fund’s (IMF) projections of the gross domestic product (GDP) growth are not so optimistic. GDP growth is expected to slow to 8.2% this year from 10.4% in 2010 and is projected to moderate further to 7.8% in 2012. Interestingly, IMF also points to investment demand as a driver of growth. It says, “Infrastructure will remain a key contributor to growth, and corporate investment is expected to accelerate as capacity constraints start to bind and funding conditions remain supportive." Maybe so, but a rebound, if it can be called that, is expected only in the fourth quarter of 2012, when IMF pegs year-on-year (y-o-y) growth at 8%.

The HSBC Composite Purchasing Managers’ Index (PMI) was at 60 in March, which denotes strong expansion. Nevertheless, it does show a slight deceleration from February’s level of 61. The press release said: “The slowdown of growth was evident in both the manufacturing and service sectors, although was more prevalent in the latter." Further evidence is provided by a slowdown in credit growth.

The Index of Industrial Production (IIP) for February also indicates a deceleration. The growth in IIP was 3.6% y-o-y, coming on top of 15.1% growth in February 2010. In January, IIP growth was 3.7% (later revised up to 4%) on top of a 16.8% growth in January 2010. Seen in that light, the February numbers do indicate a slowdown. The negative growth in capital goods dragged down the index, although it does come on top of a 46.7% growth in capital goods in February last year.

Real GDP growth at market prices (at 2004-05 prices), which is the metric IMF looks at, has already fallen from 10.4% in the second quarter of FY11 to 9.7% in the third quarter. A deceleration to 8.2% in calendar year 2011 will be a sharp drop.

Company-level data seems to corroborate what IMF is saying at the macro level. For instance, a March quarter (Q4) earnings preview by Citi strategist Aditya Narayan says, “India’s earnings growth in 4QFY11 should be in single digits, ex of Energy… This is a significant step down from the 35%+ in 1QFY11, and reflects a progressive moderation in growth during the year." Brokerage Motilal Oswal Securities Ltd is predicting earnings growth for the Sensex companies at 26% in FY11, 19.2% in FY12 and 17.5% in FY13. A note by Edelweiss Securities Ltd says, “The consensus is still ignoring the cost pressures, which could lead to downgrades for FY12 earnings."

The trouble is that although growth is slowing, inflation may not come down to the desired extent. The PMI data points to continuing pressures on input and output prices. And although consumer price inflation is projected to fall sharply this year, IMF has this to say: “Inflation pressure is most evident in India, where despite some moderation, inflation has become more generalized and is projected to remain high—averaging 7.5% this year."

That should keep the Reserve Bank of India (RBI) in tightening mode. As a matter of fact, in research notes by both Citi and Kotak Mahindra Bank Ltd released after the IIP numbers, they point to sticky inflation as the reason why they expect RBI to raise the policy rate by another 75 basis points. It’s difficult to see how growth can revive under these circumstances. Nevertheless, the guidance provided by firms for FY12 outlook will provide further clues about growth and investment demand.

Graphic by Sandeep Bhatnagar/Mint

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