Is economy close to bottoming out?

Did the stock markets smell it ahead of others? The Indian economy is close to bottoming out, says leading research outfit Nomura.

After four quarters of consecutive declines, the index which measures real M2 money supply, non-oil imports, equity returns, repo rate, real bank credit, industrial output and tourists rose in first quarter (Q1) of fiscal 2009-10 suggesting pick-up in economic activity.

Nomura uses a composite leading index (CLI) to identify turning points in the growth rate cycle. The index which had fallen from near 102 levels in September 2007 to 99, shows a breakout from current levels and seems to be rising upwards.

Since the CLI has a lead of two quarters over non-agricultural GDP growth rate-the pick up in Q1 suggests some pick-up in economic activity from the third quarter, feels Nomura economist Sonal Varma.

“Export and production data in several Asian countries (including India) have continued the improvement seen in previous months,” chief analyst Allan Von Mehren of Dankse Bank, Denmark’s largest bank.

Purchasing managers’ index for new orders show that after falling in mid-2008, the index for India has recovered significantly.

However, the recovery for the economy may not be very quick. Nomura says the decline in real GDP growth (the latest data available are Q4 of fiscal 2008-2009 ) will continue in first six months of 2009.

“We forecast real GDP growth to trough in the second quarter of FY09 at 4.5% year-on-year, led by inventory de-stocking and a further weakening of output in the services sector.”

But it maintains that overall, the turnaround in the leading index is positive . “We interpret it as a sign that the Indian economy is now close to bottoming out,” the Japanese outfit said.

Meanwhile, Citigroup economists feel that consumer price index could fall from 9.6% levels in Feb 09 to 5-6 % range soon as good monsoons could see new crop coming in. While latest inflation data pegs the WPI at 0.3% for the week ended 14 Mar, however the consumer price index (CPI) - released on a monthly basis - remained at neardouble-digit levels, up 9.6% in Februray 09.

“Given the base effect and new crop coming in, it is now consensus that normal monsoons will result in the CPI moderating to 5-6 % levels. Importantly , food articles comprise 14% of the wholesale price index but 57% of the CPI,” Citigroup economists Rohini Malkani and Anushka Shah said. - ET