There’s a question that seems to plague everyone these days — why are foreign institutions relentlessly pumping dollars into Indian equities, even as the macroeconomic scene doesn’t look any better? Till about August, macroeconomic data emanating from India and other economies had only shown growth contractions and rising deficits but of late, there’s been a slight shift. From an uptick in industrial activity and economic growth to rising export orders, green markers are visible not just in India but even globally.
Indian markets have already factored in the known downside risks (twin deficits and below potential growth) and moved on to more current data, which seems to suggest that a recovery, however modest, could be under way. So where’s the cheer? For starters, the eight core sector industries (coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity) grew 6.5 per cent in October, after revised numbers showed a five per cent growth in the previous month. The core sector growth is at an eight-month high, indicating some kind of a revival in industrial activity. It’s apparent the market is discounting the weakness recorded by industrial production in the last couple of months.
More important, export orders are making factories buy more. After remaining flat in the preceding four months, manufacturing PMI for November has touched a five-month high at 53.7 (52.9 the previous month). “PMI hit a five-month high, boosted by new orders and a solid expansion in output. The output index grew at the fastest pace in five months to 55.4, while the new orders index also expanded at its strongest pace in five months to 55.8,” says Shubhada Rao, chief economist at YES BANK. Other economists also expect the external situation to continue to be supportive in 2013.
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The world is not falling off any cliff, at least not yet. China, the world’s second largest economy, is showing early signs of bottoming out. China’s HSBC PMI for November rose to 50.5 from 49.5 in October, indicating expansion after 13 months, says brokerage firm Prabhudas Lilladher.
The US economy, too, surprised markets with its 2.7 per cent growth in the September quarter, after growing at 1.3 per cent in the June quarter and two per cent in the March quarter. While Europe is not looking as promising, PMI data suggests that the pace of decline in industrial activities has slowed sharply. The Euro zone’s manufacturing PMI rose slightly to 46.2 in November, against 45.4 in October. A reading below 50 indicates contraction.
Weak demand from Europe and the US has hit India by way of slowing exports, so any revival in these economies is a positive sign for India. Taimur Baig of Deutsche Bank expects a pick-up in external demand next year, and exporters would also be supported by a considerably weaker exchange rate. The authorities’ strategy to cut overall spending on one hand and roll out major projects on the other could galvanise business sentiments, he adds.
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What has come as a big surprise to most economists is the slight moderation in the government’s fiscal deficit so far, compared to the year ago period. The April-October fiscal deficit stands at Rs 3.68 lakh crore, which is 71.6 per cent of the budgeted target for FY13, marginally lower than the 74.4 per cent seen in the corresponding period last year. The pace of the government’s spending is also down, explain economists. The government’s total expenditure between April and October stands at 52.3 per cent of FY13 Budget estimates. Baig and Kaushik Das of Deutsche Bank believe India can look forward to a better 2013. Though the economy remains vulnerable to inflation and exchange rate risks, coupled with external shocks and domestic political turbulence, incentives are in place for the authorities to respond with investment-friendly reforms.
Call these green shoots, if you may, but none of the positive data can be taken for granted. There are many risks that would stub these shoots out. Analysts expect the reforms push to slow down in 2013 as India goes into election mode. And, while earnings growth is expected to recover from the current seven per cent to 12 per cent levels in FY14, persistently high inflation may delay rate cuts, which would further delay investment revival.
Even globally, if the Obama administration is not able to avert the fiscal cliff, the US could slip into recession and that would have a contagion effect.