"Economic performances has improved a bit in the last quarter compared to the previous couple years. Quick estimates peg Index of Industrial Production (IIP) at 7.3 per cent. Data on six key key infrastructure inducstires (accounting for 26.7 per cent of IIP) indicates 3.9 per cent growth in a few key sectors: automobiles, cement and steel. Production of commercial vehicles grew 49 per cent in the first two months of the fiscal while sales grew 60 per cent. Cement despatches registered 27 per cent growth during the first quarter", the report said.

However, the report says that there continues to be indicators that force one to take a cautious view on an upturn. "Non oil imports have declined 10 per cent during April-May over the corresponding period last year. Moreover, inflation ofmanufactured products has dipped below 2 per cent. This indicates the inablity of producers to increase prices in the abscence of strong demand. However, manufacturers have raised prices for cement automobiles and steel in the recent past and it has to be seen whether these price hikes can be sustained", the report says.

"Automobile sales could be due to the cyclical phenomenon of de-stocking; one has to keep an eye on the growth after dealers restock," it said. "Furthermore, there is no evidence of a pick-up in real sector investments. In sum, we believe that though there are reasons to be a bit optimistic about a recovery, it is not yet time to start celebrating." the report said. Commenting on the growth factors,I-Sec said the growth in cement sales is believed to be due to an increase in demand from the housing sector and could peter out in the absence of large-scale industrial and infrastructure investments.

The report added that the indirect tax collection were robust during the quarter. Customsduties were higher than the corresponding last year by 12 per cent while excise duties grew 29 per cent. Though higher customs collections can be attributed largely to the higher oil prices,growth in excise points towards a manufacturing growth.

"An overall recovery in Asia has also contributed to some extent. International commodity prices have been on an upswing, especially in petrochemicals and metals, resulting in higher implicit tariff aiding domestic producers", the I-Sec said.

Data from the services sector however supported the economic recovery hypothesis, I-Sec added. Truck freight rates had risen during the quarter over year-ago level, revenue-earning freight carried by the railways had also gone up during April and May while traffic at major ports grew had also gorwen, it said.

With the two-month old Kashmir conflict out of the way, it appeared that additional expenditure on this account had been kept to manageable limits and damage to the economy was not too significant, I-Sec said. Politicsremains the main concern, it said.

The report said current indications suggest no political party is likely to obtain a clear majority in the general elections due in September. "Lack of political stability could hinder real sector investment and impact the prospects of economic turnaround adversely," I-Sec said.