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New Delhi: The Indian economy will recover from the slowdown in the second half of 2009-10, thanks to the strong domestic market and improving financial sector, investment bank Goldman Sachs said Monday.

“We expect a recovery in activity in the second half of fiscal 2009-10, led by a pick-up in domestic demand amidst the loosening financial conditions,” Tushar Poddar, an economist with Goldman Sachs, said Monday.

“The positive surprise coming from domestic activity data, excess liquidity in the system, a substantial easing of financial conditions, declines in some key interest rate spreads, and the removal of election uncertainty suggest that activity will pick up in the second half,” he added.

According to him, the positive cues were reflected in the stock markets.

“Markets seem to be driven by both domestic and global factors. The Sensex increased 21 percent month over month, outperforming the S&P by 8 percent,” Poddar said.

Foreign institutional investment (FII) rose to $1.8 billion in April after falling $1.2 billion in March and the rupee appreciated 2.3 percent against the dollar, he said.

According to Poddar, the key risk is “the formation of an unstable coalition and the ratcheting up of long bond yields due to greater borrowing by the government to finance the post-election budget”.

Manufacturing sector to be hit by slowdown for some more time, it says. A survey conducted by the Reserve Bank of India (RBI) has estimated that the Indian economy would grow at less than 6 per cent during the current financial year, the slowest expansion since 2002-03.

The median forecast of professional forecasters’ survey estimated that the economy would grow by 5.7 per cent during the current financial year and also revised the growth projections for 2008-09.

According to the Central Statistical Organization’s advance estimates, GDP is projected to grow by 7.1 per cent in 2008-09. This would be the slowest growth since 2002-03, when the economy grew by 4 per cent. For three successive years up to 2007-08, GDP rose at a rate of over 9 per cent.

Agriculture, which is projected to grow at 3 per cent during the current financial year, provides a silver lining of sorts with services and industrial growth expected to moderate.

During the current financial year, imports and exports are projected to contract by 4 per cent and 8.4 per cent respectively. This indicates that the manufacturing sector would continue to feel the impact of the global slowdown for some more time.

The only good news is that there are signs of the economy bottoming out. During April-June, the GDP is expected to rise by 5.3 per cent, before improving to 5.6 per cent in the second quarter. The Indian economy is expected to grow at 6.2 per cent in the third and 6.5 per cent in the fourth quarters. During the third quarter of 2008-09, the Indian economy grew by 5.3 per cent as against 7.7 per cent in the first half.

While RBI expects inflationary pressure to remain low during the current financial year due to low commodity prices globally, it also points out that high food prices have kept consumer price inflation at elevated levels. During January-February, inflation based on consumer price indices has hovered around 9.6-10.8 per cent as against 7.3-8.8 per cent in June 2008.

Pointing to more pain for companies, the forecasters’ survey estimated the growth in corporate profit to fall to single-digit rates.

In addition, the quarter-ahead expectations survey on industrial performance conducted by RBI projected all-round deterioration during April-June 2009. Only 11.2 per cent of the respondents said that the overall business situation would be better and 8.4 per cent said the financial situation would be better.

“In sum, the Indian economy has experienced some loss of growth momentum with major drivers of growth witnessing moderation,” RBI said in its pre-monetary policy assessment today.

While savings and investment rates are expected to decline during 2008-09, RBI said the fiscal stimulus packages announced by it and the government would help arrest the moderation and revive consumption and investment with some lag. Besides, it said that the balance of payment position remained sustainable in the context of the present level of foreign exchange reserves and external debt.

Among the positives, the central bank, which is due to announce the annual policy statement for 2009-10 tomorrow, said that foreign exchange reserves continued to remain at comfortable levels, and would ensure stability, despite falling by $59 billion over the last 12 months.

The corporate sector expects the period of downturn in the Indian economy to continue till May 2010 before bouncing back in response to the fiscal and monetary policy stimulus and abatement of recession in the international economy.

This was revealed by Assocham Business Barometer (ABB) Survey of CEOs.

In the ABB Survey, 84 percent of the CEOs polled across various business segments were unanimous about the view that poor business confidence in India may extend till the middle of the next year.

Around 77 percent of the industry heads believed that the growth rebound would be faster and sooner in India than the developed economies of US and Europe, said Assocham President Sajjan Jindal.
The key driving factors for end of slowdown in India, cited by the ABB respondents, included reduction of repo rate and reverse repo rates infusing liquidity in the markets, government in terms of improved fiscal spending and fall in inflation providing cushion to the industry in terms of reduced cost.

The industry expects the economic activity to pick momentum after the elections as the stalled projects would resume and fresh budgetary allocations would further boost the economy. The combined impact of these factors would be felt after the end of the fiscal 2009-10.

About 60 percent of the Indian GDP is domestic consumption and the percentage contribution of exports is 23 percent. Hence, even as it would be difficult for the export sector to revive by the end of this year, the Indian economy may regain its lost momentum in response to government investments and domestic consumption.

The investment scenario in the Indian economy has taken the hit as both domestic as well as foreign investment dipped due to credit crunch and declining demand. As many as 73 percent of the CEOs expect the investments to recoup by the end of the year 2009 as domestic consumption potential would pull the investors to the economy.

The ABB Survey, Economic Outlook for India, was based on the responses from 237 CEOs and managing directors across 15 sectors at small, medium- and large-scale level companies. The survey was done during the month of February.

It may be recalled that Samir Barua, director, Indian Institute of Management-Ahmedabad (IIM-A) had however, said last month that the Indian economy could witness an upsurge, and be back on growth trajectory by end of third quarter this year as compared to the  expected upturn in developed economies of the world by second quarter of 2010.

“We might witness an upturn and restoration of normal GDP growth say of 8% against the projected sub six per cent presently, as early as in third or fourth quarter of 2009, but will be subjected to fulfillment of few pre-conditions,” Barua said while addressing a gathering on Central Excise Day in Ahmedabad.