India’s slowdown “seems to have been a short pause rather than anything more serious”, says Kevin Grice of Capital Economics. Quick action by the central bank, a cautious approach to globalisation and resilient spending by rural households all helped to insulate it from the worst of the global recession.
Now the economy is picking up and solid growth looks likely, even if government targets of 9% in 2010-2011 look “too ambitious, given the continued acute infrastructure constraints”. The wildcard is the monsoon: the rains are 36% below normal so far this year and agriculture, which still accounts for 17% of GDP, could be a drag on growth if this doesn’t improve. Still, corporate profits have been cut significantly by the slump.
Earnings for the Sensex benchmark this quarter are set to fall 14% year-on-year, say Aditya Narain and Tirthankar Patnaik of Citigroup. Worst hit is real estate (down 87% amid the bursting real-estate bubble). Oil, metals and autos are also down.
These results are probably close to the bottom, but investors should remain cautious: an earnings slump like this “is usually fairly challenging to reverse” quickly.