One critical question that is often asked, discussed and debated these days is with respect to the bottom of the cycle. That is, how low can growth fall before economic recovery begins. Regular readers may be aware of my hypothesis of economic recovery from the third quarter onwards.

We do know that automobile sales, especially private vehicles have shown signs of improvements and there are early signs of recovery of economic growth in the month of October. I am optimistic of recovery from the third quarter of the current financial year. But what is more concerning is with regards to the bottom of the cycle.

Three critical questions are, how low can this bottom be, the second is if there is a recovery, how quick it will be and the third is with respect to the duration of sustaining the positive business cycle once it emerges.

The answer to the first question is straightforward, growth in second quarter is likely to be the new bottom. This is further supported by the fact that we saw the worst IIP figures in the 2011 series for the month of September.

Though IIP captures a small set of manufacturing activity, however, it does act as an indicator of what is going on in the manufacturing sector. At a time when rural growth remains muted and IIP figures are sluggish, one finds little reason to assume growth to be above 5 per cent.

My initial forecast for first quarter growth was at 5-5.4 per cent while for second quarter it was at 5.2-5.6 per cent.

Clearly, first quarter was towards the lower end of the spectrum and consequently, I revised the forecast for second quarter to 4.8-5.2 per cent based on the then available set of data. Since then, government interventions have given me reasons to be a bit optimistic about the growth figures.

The implicit model behind the forecast also suggested growth to be at least 4.7 per cent. However, most analysts expected it to be at 4.5 per cent. Post the September IIP figures, they have revised downwards their forecasts to 4.2-4.3 per cent on an average.

However, even after incorporating the data for September IIP, the baseline model suggests 4.6 per cent to be the new bottom.

Consequently, the forecast is revised to 4.6-5 per cent, although growth is unlikely to be closer to 5 per cent in the second quarter. This implies that we are going to find out the answer to what will be the new bottom over the next couple of months.

The second question with respect to the pace of recovery depends on a wide range of issues. For starters, it depends on what happens to monetary policy in December.

Inflation has been muted and within the ‘4+-2 per cent’ range, and therefore, we should see aggressive rate cuts. We haven’t seen them so far and that maybe a reason why the output gap seems to have widened.

Clearly, Reserve Bank of India’s forecasts of future inflation and growth didn’t factor in such low estimates and this has become a major worry for many of us.

As far as the third question is concerned, unfortunately the answer to this depends on multiple factors such as what happens to our banking sector recovery, our NBFCs and more importantly, what is the outlook for global growth in the foreseeable future.

However, India does have a lot of low-hanging fruits to sustain and grow at above 7-8 per cent for the next decade and if there is any government that can ensure we achieve this then it is a government with a mandate of 303 with Narendra Modi at its helm of affairs.

ILFS Crisis

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