Green shoots, but what about the roots? Financial Express 27th August 2009

The ‘green shoots’ theory is cloaked ironically in black humour as the shoots in the fields will probably not blossom with the nation being in the midst of a drought. Industrialists are talking of how industry is immune to this phenomenon, even though a drought means more poverty and cattle death. The issue is whether these green shoots are for real or whether they are hyped, imaginary visions.The excitement over a recovery is palpable across the globe where analogies are drawn from the English alphabet, with the recoveries being debated as being U, V or W shaped. The true picture really is dynamic because every time we think we have spotted the rainbow lining to the U (we have not reached the V as yet), there is a downside making the so-called W more plausible in small rather than capital letters. To take an impassioned view, the two sides to the argument may be laid down.First, the green shoots can be spotted from increasing industrial growth rates in the last four months and come against the background of negative growth rates, which really means that things have changed. Growth appears to be sanguine in case of basic, intermediate and consumer durable goods, which is encouraging as it gives hope that if sustained, it can actually forge the strong backward linkages. Cement, coal and electricity segments of infrastructure are looking up, which means that something must be happening.The above is partly reinforced by the numbers on traffic carried in terms of coal by the railways, which has been increasing. The capital markets are up, not in terms of the secondary market indices but plain capital issues as companies are raising more capital through both the debt and equity routes, which must be for investment. There is hence reason to believe that industry is going to invest more, which would not have been the case if they were not very optimistic of production.To a certain extent this story is supported by growth in production of passenger cars and two-wheelers, which implies that contrary to the gloom in the white collar job market, people are spending more, which has probably—and not with certainty—been supported by the banks (the overall picture tells a different story).The other side of the arguments has a longer list. The first is that growth in credit, which is the foremost leading indicator of industrial activity, is slack. Growth in credit for the period April-July has been lower at 1.1% (2.6%) and even the YoY number is lower at 15.8% (25.6%). Second, while industrial growth has been showing a recovery, cumulative growth for the first quarter is still lower than that last year—3.7% as against 5.3%. Third, production and sales of commercial vehicles including tractors are down, indicating that the drought will cast a shadow on this segment. Fourth, corporate performance continues to provide an ambivalent picture. While net profits have been growing, top line growth is missing. Sales have declined and are in the negative territory. Profit growth is more due to sharper decline in costs, which means the sector is becoming efficient, though not really growing.Fifth, while trade deficit has improved due to softer crude oil prices, both exports and imports growth are less than that last year. This is also seen from the port traffic statistics where less cargo is being handled for exports. Sixth, investment in mutual funds, which is a quick indicator of retail participation in the capital market, is lower in the first four months of the year relative to last year. This means that the shine being seen at times in the stock market is more due to foreign institutional activity and not really from within. Finally, WPI inflation numbers are in the negative zone for non-food manufactured products, which have to turn positive to support the turnaround hypothesis.The arguments are tilted against the motion that the green shoots are flowering. The drought is serious and while negative growth in agricultural production in the past does not mean lower overall growth (correlation with industry and services is 26% and 31%), it will call for various policy actions on both monetary (increase in loans, higher NPAs) and fiscal (loan waivers, subsidies) fronts. The so-called green shoots that we are conjuring may last for a longer while as the statistical low base of 2.3% growth in the IIP last year cannot get worse.Also, the predominance of the services sector of which around 40% is in the unorganised sector (such as transport, restaurants, retail trade, etc) may help to deliver good numbers by March 2010.