India Economy Shows Recovery Signs, UBS, Standard Chartered Say

May 28 (Bloomberg) -- India’s economy is showing signs of a rebound as interest-rate cuts encourage spending and foreign investors return, said UBS AG and Standard Chartered Bank.

A “consumption recovery and therefore higher industrial sales should be months away,” Philip Wyatt, a senior economist at UBS in Hong Kong, said in a report yesterday. “Private consumption will lead the Indian economic recovery.”

Asia’s third-biggest economy is forecast to expand 6.2 percent in the year ending March 2010, compared with an earlier prediction of 5.2 percent, UBS said this week. Standard Chartered economist Anubhuti Sahay said in a report yesterday that risks to the bank’s 5 percent forecast for the same period were now “to the upside” and Morgan Stanley raised its estimate to 5.8 percent from 4.4 percent.

Six interest-rate cuts in as many months and fiscal stimulus measures are providing the nation with a kickstart worth almost 7 percent of gross domestic product, according to the central bank. Foreign investors encouraged by Prime Minister Manmohan Singh’s decisive election victory this month are also flocking back to the nation.

“Foreign institutional investors have made a dramatic re- entry into India,” UBS’s Wyatt said. “Net inflows increased from $100 million in March 2009 to $1.3 billion in April 2009.”

The Bombay Stock Exchange’s Sensitive Index, or Sensex, has soared 46.3 percent this year amid investor optimism of an economy recovery. The index yesterday gained 520.41, or 3.8 percent, to 14,109.64, the biggest increase since May 18.

‘Signs of Recovery’

India’s rupee has strengthened 5 percent this month, the best performance among the 10 most-traded Asian currencies tracked by Bloomberg.

Economic indicators are starting to show “some early signs of recovery,” Standard Chartered’s Sahay said. The government will release figures for GDP for the three months ended March 31 in New Delhi tomorrow.

Overall manufacturing in India rebounded in April amid a recovery in domestic demand, ABN Amro said in a May 4 report after its Purchasing Managers’ Index increased to 53.3 from 49.5 in March. A reading above 50 indicates a gain in factory output.

Car sales and the production of cement, electricity and refined petroleum are also showing signs of revival. India’s passenger car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data.

Fiscal Stimulus

“Falling interest rates provide an incentive for people to shift from an attitude of precautionary saving to spending,” UBS’s Wyatt said. “A sustained reduction in interest rates should boost consumption.”

India’s expansion may get further support if next month’s budget includes fresh investment and improves the mechanism for implementing expenditure, Standard Chartered’s Sahay said. The bank expects extra stimulus from the budget at the “lower end” of the government’s initial projection of 0.5 percent to 1 percent of GDP.

Finance Minister Pranab Mukherjee said yesterday that he would unveil the budget in the first week of July and the government would continue to step up spending to support growth.

Mukherjee is aiming to revive India’s GDP to about 9 percent, the average annual pace the country recorded between 2004 and last year. The $1.2 trillion economy probably expanded about 7 percent in the year ended March 31, the 73-year-old finance minister said earlier this week.

Prime Minister Singh’s re-election victory saw his Congress party getting 206 lawmakers of its own. That’s the most since 1991, when Singh as finance minister abandoned Soviet-style state planning and introduced free-market policies that helped India’s economy quadruple in size.

“This outcome is a huge positive surprise and is likely to allow the new government to initiate some long-pending structural reforms,” said Chetan Ahya, an economist at Morgan Stanley in Singapore. “Decisive policy actions will be critical to lift the pace of GDP growth closer to potential.”