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Green shoots emerging in India? - Views on News from Equitymaster
 
 
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  • Aug 13, 2009

    Green shoots emerging in India?

    Fed sends positive vibes on US economy
    Asian stocks have opened today strong following the US central bank's announcement yesterday that recession there is easing. This sparked off a rally in US stocks, as the Dow Jones Industrial index closed yesterday amidst strong gains. The US central bank (Federal Reserve or Fed) has also pledged to keep interest rates near their current historic lows of 0% to 0.25% to sustain the economic momentum.

    While the Fed policymakers expect inflation to remain subdued for some time, they expect interest rates to remain at the current levels 'for an extended period'. Overall, this seems to be the Fed's most bullish assessment of the US economy in more than a year, and probably suggests that a recovery may have started.

    Incidentally, while the Fed was outlining its bullish views on the US economy yesterday, one of the senior members of the US government was sounding some caution. Larry Summers, Director of the National Economic Council has said, "We have a long way to go. The problems were not created in a week or a month or a year and they will not be resolved in a week or a month or a year." Though even Summers believes that the free fall that the US economy was seeing till about an year ago has been contained and that the economy is seeing some early signs of revival.

    'Green shoots' in India as well?
    Does India's industrial production numbers announced yesterday suggest that the economy here is also showing some early signs of revival? Difficult to say, we believe!

    As reported yesterday, India's industrial production grew by 7.8% YoY during the month of June 2009, as against a 2.2% growth recorded during May. This sharp rise in June was on account of higher demand for consumer goods and increased mining activity. Output of consumer durables such as home appliances, for instance, rose by 15.5% YoY during the month.

    Goldman Sachs, one of the leading financial institutions in the world, now has a view that economic gains from industrial activity (i.e., rise in industrial production) will mitigate the negative impact of poor rains. Believing that financial conditions have eased, the institution is of the belief that the same will help in lessening the impact of the agricultural sector, which has been impacted due to poor monsoons.

    However, we are of the belief that erratic monsoons could severely impact demand over the next few months. This is considering that rural demand, which accounts for more than half of India's domestic consumption, has been largely impacted in the past when monsoons have been weak. And the impact is felt on industrial production as well.

     

     

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