INDIAN ECONOMY SHOWING SIGNS OF RECOVERY

UNCLAS SECTION 01 OF 03 NEW DELHI 000872

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SUBJECT: INDIAN ECONOMY SHOWING SIGNS OF RECOVERY

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1. (SBU) Summary: The Indian economy is showing some signs of
recovery from the current slowdown, with many analysts predicting
that the downward cycle is expected to bottom out in the second half
of FY 2009-10 (October-April). The core sector (including power,
cement, and steel) and automobiles, telecom, port traffic and retail
sales are already showing signs of increased activity. The rural
demand for goods and services appears quite robust and the outlook
of the agricultural sector looks optimistic, as "near" normal
monsoons are predicted. Hiring in sectors such as banking is also
showing some signs of increase. However, it is too early to
conclude that this is the start of a next broad-based expansion.
Many industries such as manufacturing, small and medium enterprises,
real estate, tax collections and exports remain in the red. India's
structurally broad industrial base suggests that industrial growth
will need more time to get back to normal. Although the IMF
recently downgraded India's growth projection to 4.5% in calendar
year (CY) 2009, these recent signs of recovery suggest the
possibility of above-5 percent growth. Even with the IMF's lower
estimate, it still pegs as one of the fastest growing economies in
the world, after China. End Summary.

Some Sectors Showing Glimmers of Hope
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2. (SBU) Planning Commission Deputy Chairman and de facto Finance
Minister Montek Singh Ahluwalia has said that the stimulus packages
and duty cuts announced by the government to revive the economy in
the past five months have started paying dividends, as evidenced by
growth in key sectors noted below. He expects the economy to start
showing definite signs of recovery in the second half of the FY
2009-10, that is, from October onwards. This week, Swiss Bank, UBS
AG, Barclays, Capital and Marquarie Bank also observed that the
Indian economy seems to be improving, and that the slump in emerging
Asia is over. Economists also point out that revival might be around
the corner, driven by interest rate cuts by the Reserve Bank of
India, a recovery in the Chinese economy, and a strong growth in the
outsourcing sector. The following positive trends also suggest a
turnaround is more probable than not later this year:

--The capital goods sector showed a healthy growth of 10.4 percent
in February compared to February 2008. The core sector, consisting
of output of steel, cement, electricity, coal, and oil products,
which together comprise 26.7 percent of the index of industrial
production (IIP),is also back on the track. It grew by 2.9 percent
in March, the highest year-on-year growth since September 2008. The
biggest surprise was power generation which touched a 13-month high
at 5.9 percent in March. The availability of coal has improved and
the coal units that were commissioned last year are working well,
resulting in higher generation of power, according to news reports.


--Cement output registered buoyant growth of 10.1 percent in March,
showing healthy construction levels. Dispatches were also robust in
March, due to restocking, and strong rural demand. Mutual funds
have increased their exposure in leading cement firms, suggesting
they expect sustained demand. The 212 million ton-cement industry
may add around 30 million tons of new capacities this fiscal year.

--Steel output, which had declined from September through November
last year, showed some recovery in December and January this year.
However, it declined by 2.6 percent in March. According to the World
Steel Association, India is the only economy whose steel consumption
is expected to grow by more than 5 percent in 2009 due to high
spending on various construction and infrastructure projects. The
construction industry, which has a multiplier effect, is responding
to higher government expenditures and lowering of interest rates for
private borrowers.

--The auto industry recovered in March 2009, with total automobile
production exceeding total sales for the first time in seven months.
Cars and two-wheelers growth was aided by the four percent cut in
central excise tax from the December stimulus package and from
discounts. The increase in government salaries, coupled with the
better credit availability and the launch of new models (including
Tata's Nano),could result in sustained trends in the coming months.

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-- Many retailers have continued their expansion plans in the past
12 months and are banking on latent rural demand and aggressive
promotional discounts to boost growth.

--India continues to be the fastest-growing telecom market in the
world, adding 15.64 million wireless subscribers in March, and
taking the total number of subscribers to 391.76 million. Declining
tariffs and innovative services have resulted in wireless
technologies becoming the preferred mode of communication in rural
markets.

--Port traffic at 12 major ports seems to have improved modestly in
March. It remained negative at 7 out of 12 ports in March 2009,
versus 9 ports in February 2009. Though trends in air passenger
traffic remain weakened in 2009, the low fares and some reduced
surcharges could result in positive growth in traffic in FY 2009-10.


--New gas facilities became operational in April. Taking into
account lower oil prices and new hydrocarbon discoveries by
Reliance, Cairn, and the state-owned Oil and Natural Gas
Corporation, Citi projects that India's net oil imports this fiscal
year could be $30 billion lower than last fiscal year.

--Foreign Institutional Investors (FIIs) turned net 2009 buyers in
the Indian markets in April, after being net sellers in January to
March of $1.3 billion. FIIs sold $13 billion worth of equities in

2008. The Sensex was the top performer among leading global indices
in April 2009 with returns of 17.7 percent in dollar terms.

More Jobs Coming Up
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3. (SBU) Oscar Fernandes, Labor Minister, recently indicated that
half a million jobs had been lost in India due to the slowdown.
However, media is reporting in recent weeks that firms started
hiring again in April 2009. Headhunters have seen a 50 percent rise
in the number of queries issued by companies in the past weeks, led
mainly by health and pharmaceutical sectors. Other sectors driving
up the hiring exercise include life sciences, infrastructure and
manufacturing. Public sector banks plan to hire 30,000 employees in
2009-10, due to new opportunities in the banking sector owing to
branch expansion. A recent survey by Hewitt says that 60 percent of
Indian companies are still hiring. Corporate employees expect their
salaries to increase by 8 percent this year.

...But Things Still Not Back to Normal
--------------


4. (SBU) While positive data are trickling in, it is too soon to
call it a "recovery". A number of indicators are a cause of
concern. Manufacturing declined by 1.4 percent in February. With
exports also estimated to have declined by 30 percent in March,
industrial growth may remain weak in the coming months and may only
recover gradually. However, the fall in India's industrial
production has been less when compared to other Asian economies
primarily because India is not heavily dependent on exports.


5. (SBU) Falling real estate prices, coupled with low transaction
volumes are also a cause of worry. Despite lower property prices,
growth in outstanding housing loans, used as a proxy for residential
transaction volumes/demand remains weak. House buyers, though in
small numbers, have started returning to the market after developers
cut property prices between 25-40 per cent for new bookings. But a
majority of the buyers are said to be still waiting for a further
correction in prices.

Comment
--------------


6. (SBU) The recent monthly numbers are not sufficient to conclude
that the economy has fully turned the corner and is recovering.
Individually, none of the indicators are hugely powerful, but

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collectively they should drive a recovery later this year which is
likely to gain momentum in 2010. They also demonstrate the strength
of the domestic market, including a lot of healthy purchasing power
in the rural sector. Exports, a main channel of manufactured
products, will have to wait for economic revival in the US and
Europe. However, other areas of industrial growth, along with
sustained demand for services, and some good agricultural output,
can maintain a healthy level of economic growth and employment, that
suggest India will experience a V-shaped recovery in the latter half
of the year.

BURLEIGH