Going by the economic statistics, Indian economy does seem to be coming out of the woods. The latest HSBC Private Sector Survey suggests expansion in the service sector. The growth in the activity and fresh business orders has taken service and manufacturing sector index to a five month high. The improvement in PMI has been contributed by all the sectors except financial services. This is indeed good news, considering the fact the services account for more than half of India's GDP.
Low price levels could have contributed to boost in the business activity. However, it might be too soon to celebrate. This is because while the data is positive, the business sentiments in the private sector have weakened. It is noteworthy that the business expectations have witnessed the sharpest fall and are currently at the lowest level this fiscal. Infact, the sentiments have slipped to the weakest level in last seven years. And that certainly does not bode well for the economy. While this could be attributed to a weak quarter ahead because of modest Kharif harvest, it also suggests that the pace of reforms has not been strong enough to sustain business confidence. And in the absence of the same, the domestic investment is unlikely to get stimulated. Also, the employment in the service sector is hardly witnessing the benefit of growth in the business and has shrunk marginally. Even the GDP growth this quarter has declined sequentially and there has been a slowdown in the private consumption and export growth.
The mood in the private sector seems slightly different from what was seen some months back when everybody was hopeful of better times ahead. It also suggests that a real recovery is yet to be seen, and unlikely to continue if the government fails to deliver timely on the expected reforms. On the positive side, the inflation seems to be coming down. If interest rate cut, it is likely to boost investment growth.
While the broad economic data might seem confusing, one thing is very clear. The current euphoria in the markets is not just about fundamentals. Hence, investors should focus more on bottom up approach rather than giving too much importance to macro economic data while taking investing decisions.