| NEW DELHI/SHIRDHON, India
NEW DELHI/SHIRDHON, India Nov 28 Pandurang
Ghorpade has the weather to thank as he hands out celebratory
sweets to neighbours eager for a ride on his prized new
possession, a gleaming red tractor bought in anticipation of a
"Unlike last year, there wasn't any shortage of water this
year," Ghorpade said. "My earnings are likely to rise from sugar
cane and ginger crops that have grown vigorously."
The best monsoon in six years means similar scenes to the
one in Shirdhon southeast of Mumbai are being played out across
much of rural India, home to two-thirds of the 1.2 billion
population. It also means sales of tractors and motorbikes are
surging, raising hopes this pick up in activity will spread and
feed a wider revival in an economy that has slumped to its worst
growth in a decade.
But the benefits may be fleeting because rural growth alone
will not be enough to pull India's economy out of the doldrums
longer term. The countryside produces only a third of India's
gross domestic product and in the urban areas that drive growth,
business in showrooms and shopping malls is still shrinking.
"As we sit in mid-November, we have not seen signs to
suggest that there is a significant increase in output," Tushar
Poddar, chief India economist at Goldman Sachs, said in a
conference call last week.
The economy is battling to recover from a significant slump.
Growth slid in the fiscal year to March 2013 to just 5 percent,
the lowest pace since 2002/03, as a stalled reform agenda
prompted investors to flee. A vulnerable current account swelled
to a record deficit, knocking the rupee to a record low.
Since then, rural demand and other encouraging signs - a
revival in exports and a narrowing of the current account
deficit - have given India's policymakers reason to think the
worst of the two-year slump may be over.
Tractor sales in India rose nearly 29 percent in October
from a year earlier, reaching a record high of 94,227 units.
Sales of motorbikes, bought when farmers graduate from bicycles,
jumped 18 percent in the same month.
Consumer goods companies like Hindustan Unilever
and natural health care firm Dabur are trying to boost
rural sales. Helped by the boon, Dabur's net profit jumped by 23
percent in the September quarter from a year earlier.
"We are seeing demand from rural India outpacing the urban
markets," Dabur said in its earnings release late last month.
Finance Minister P. Chidambaram also sees the rural rebound
and exports revival as encouraging, suggesting they would help
the economy recover in the second half of the fiscal year ending
on March 31.
But by the government's own estimates, expansion for the
full fiscal year could be as low as the 5 percent recorded last
year, a far cry from the 8-9 percent growth rates the government
of Prime Minister Manmohan Singh has aspired to in recent years.
Some economists, such as Poddar, argue even 5 percent may be
ambitious. High inflation is impinging on urban demand and
businesses are holding back investment until they can see the
shape of a new Indian government due to be elected by May 2014.
The central bank under new governor Raghuram Rajan has
already raised its policy interest rates twice to counter
inflation, adding to borrowing costs.
The competing pressures on the economy are expected to be
reflected in a report on Friday on India's GDP for July to
September. Although annual growth is seen rising to 4.6 percent,
a little better than the previous quarter, the data will likely
show the economy is not firing in all areas.
That is familiar to India's largest utility vehicle maker
Mahindra and Mahindra.
While the company's tractor sales jumped 21 percent as the
monsoon rains fell between July and September, sales of
passenger vehicles including SUVs, mostly bought in the cities,
slumped 25 percent.
Exports have gained sharply from the competitive boost from
India's weak currency, which is now above its record low but
still near historically weak levels.
Overseas sales generate nearly a quarter of GDP and
merchandise exports have been posting double-digit growth since
July, the best run in nearly two years.
Textiles, in particular, have made the most of a weak rupee.
Exports from the sector have grown an annual 12 percent this
year compared with a 9 percent fall last year. Most garment
exporters are either running at full capacity or have outsourced
manufacturing jobs to meet rising overseas demand.
But the good times have so far not encouraged other
industries to make the kinds of investment in adding production
capacity that would help kickstart wider economic growth -
partly because domestic demand remains depressed.
India's iron and steel industry, for example, is relying on
its idle capacity to sustain double-digit growth in overseas
sales that it recorded between April and September.
Seshagiri Rao, joint managing director of JSW Steel
, blamed subdued domestic demand from major steel
consuming industries such as real estate, infrastructure and
"This will have to come back again only then we will see
steel consumption growth in India," he said.
Weak investment lies at the heart of India's economic
malaise. Capital investments crawled at a decade-low of 1.7
percent last fiscal year. Goldman Sachs expects investment
growth to slow further to 1.2 percent this fiscal year, dragging
down overall economic growth to 4.3 percent.
To lift the sagging investment rate, the government has
expedited clearances for big ticket infrastructure projects. But
the impact on the ground has yet to be felt.
"Do I see a significant improvement in (investment) activity
over the next three to four months? I would say we have not seen
evidence to suggest that," Poddar said.