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Editorial: Hesitant recovery

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SummaryPassenger vehicles up, commercial vehicles down

Nothing tells the story of India’s strange recovery better than two sets of results out the same day—while two-wheeler manufacturer Hero MotoCorp announced a 33.4% hike in monthly sales for October, Tata Motors reported a 10% fall in the number of medium and heavy commercial vehicles over that a month ago—considering this is the start of the busy season and a festive month, that’s a telling commentary of where demand is headed. Passenger car manufacturer Maruti Suzuki reported a 6.3% hike in October sales, Hyundai 17.6% and Mahindra & Mahindra nearly 26%. In other words, the story of a partial recovery, possibly spurred by the likelihood of a better monsoon. While the core sector data, up a whopping 8% in September, suggests the recovery may be more broad-based—this will ensure September IIP will be better than August’s 0.6%—the numbers seem exaggerated. An 11.5% jump in cement output when September 2012 output also grew an impressive 13.8% seems perplexing when major producers like UltraTech and ACC have reported virtually flat volumes in the September 2013 quarter.

Indeed, the M&HCV and UltraTech/L&T story seems more consistent with the numbers coming out of banks and financial institutions on loan growth; RBI’s slightly robust credit growth numbers need to be viewed carefully since they include a new segment of demand—commercial paper—which has moved to banks where interest rates are lower. A Kotak Institutional Equities study shows sanctions for fresh projects in Q1FY14 were R22,000 crore as compared to R41,300 crore in the same quarter in FY13, R74,900 crore in Q1FY12 and R1,13,900 crore in Q1FY11. In the case of ICICI Bank, the corporate loan book, results just out, show corporate loan growth was just 11% yoy. This story is also consistent with the latest PMI numbers for October—though at 49.6 it shows industry continues to contract, this is the same as in September and slightly better than in August.

In other words, there is definitely some sort of recovery—exports are positive for the third consecutive months and in double digits—but it is very narrow. While a good monsoon augurs well for growth, the very high fiscal deficit means the government has to quickly start slowing its expenditures and that will have a contractionary impact on GDP—given how the September fiscal deficit was just R8,000 crore more than in August while it grew by around R70,000 crore in each of the past few months, this has already

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