“Green Shoots” Sprouting in Indian Economy

In the emerging world, India’s factories are humming again for the first time in five months as new orders are building up in the pipeline, pointing to a tentative “Green Shoots” recovery. India’s purchasing managers’ index (PMI), based on a survey of 500 companies, rose to 53.3 in April from 49.5 in March, climbing above the key threshold of 50 that separates expansion from contraction. India’s PMI has jumped to its highest in seven months after hitting a trough of 44.3 in December. The new orders index rose to 54.9 from 49.5 in March.

Like other emerging markets, India was hurt by huge outflows of “hot money” from last year, hammering its stock market into a rout and knocking the rupee 20% lower against the dollar. Foreign investors sold $13 billion worth of Indian shares in 2008 compared to a record influx of $17.4 billion in 2007. But since March 6th the pendulum has swung again, back in India’s favor. Foreigners bought $1.8 billion of Indian stocks in April and the rupee gained 2.3% against the dollar.

The Bombay Sensex Index rebounded above the psychological 12,000 level for the first time since early October with all its components advancing. Bombay has soared +51% since hitting a low of 8,047 on March 6th, and is up +26% this year after slumping -52% in 2008. The benchmark jumped +17.5% in April, its best monthly gain in 10 years, and the top performing Asian index last month.

India’s $1.2 trillion economy expanded at an average 9% for four straight years, but it’s vulnerable to outside influences in the global economy. Over the past two decades, successive governments have transformed the country into a cheap labor platform, particularly for hi-tech information technology and related business services. Major corporations from around the globe have exploited its large supply of highly trained, English-speaking graduates to cut business service costs. Yet fully 70% of India’s population of 1.1 billion survives on less than $2 per day.

While many Indian analysts have said the Sensex recovery since early March is a “bear-market” rally, some have switched their opinions and now believe this could be the start of a new bull run. Shares in Indian banks were hit by the global downturn, but are now attracting foreign investors on signs of an economic recovery, with bad debts not as large as their American or European peers.

India’s inflation slowed to an all time low of 0.27% in April, giving the Bank of India room to cut interest rates further to support a faltering economy. The RBI’s key repo rate at which it lends to commercial banks is pegged at a record low of 4.75% from a peak of 9.0% last year. Accompanying the rate cuts are three fiscal stimulus plans involving tax and duty cuts, infrastructure spending and other steps, totaling $4-billion. Sectors such as steel, automobiles, and cement are already showing renewed strength in the domestic market. Still, India’s export-related industries must wait for genuine recovery in the G-7 nations and other developed markets.