Why is recovery elusive?

For a broad-based economic recovery, the facilitators of growth need to turn positive

Ever since economic growth started slowing from the fourth quarter of FY11, economists and analysts maintained that recovery was six months away. This theory gained more currency after September 2012, as things stabilised in the developed world and the Indian government ushered in a barrage of reforms. Capital markets rallied on expectations that the cycle of downgrades would end in the third quarter of FY13. At the end of the earnings season, downgrades have spilled over to FY14. And, if advance estimates are anything to go by, economic growth in FY13 is expected to be five per cent, below even the post-Lehman slowdown years.

Not surprising, then that the recovery theory is being questioned, even as the Economic Survey for 2012-13 believes the downturn is "more or less over and the economy is looking up". The survey expects the economy to grow between 6.1-6.7 per cent if monsoons are normal, inflation remains benign and interest rates come down. Despite such optimism, the high frequency indicators are sending out mixed signals. Private vehicle production has contracted by 5.6 per cent in the April-December 2012 period from a growth of 23 per cent in the same period in 2011. Consumer durable production growth has declined from 12.2 per cent in the same period last year to 3.3 per cent in the first nine months of FY13. Cement production is not showing any signs of recovery either. The country's savings rate has fallen from a high of 37 per cent in FY08 to 31 per cent in FY12, expected to dip further in FY13. As the survey suggests, the economy needs investments to pick up for sustainable growth, for which the facilitators of growth need to remain benign. Indranil Pan of Kotak Mahindra Bank believes that though a full blown recovery is a little away, growth has bottomed out in FY13. However, for any recovery to happen, he believes interest rates and inflation need to come down meaningfully.

Given the mixed signals high frequency indicators are throwing up, Ambit Capital has analysed the economic recoveries from 1998 to 2013. The first indicator of any recovery is stabilisation of gross domestic product (GDP) growth rate. In the last two quarters, GDP growth has stabilised at 5.4 per cent levels. Ritika Mankar Mukherjee of Ambit says: "In-line with historical recovery patterns, select components of GDP have been exhibiting improvement. Whilst 'C' (consumption) continues to decelerate, growth rates of 'G' (government expenditure) and 'I' (investment) in 2QFY13 have been greater than that in 4QFY12." So, even if there is a one-off drop in GDP growth, as is expected in Q3FY13, it need not be taken as a "secular deceleration".

With the government going into election mode from FY14, hopes of a recovery over the next six months continue to thrive