Is India's economy on the verge of a mild recovery?

Whew! Finally some good news for the economy, after the relentless gloom of 2011.

On Monday, a widely-tracked gauge of manufacturing activity - the HSBC Markit Purchasing Manager’s Index (PMI) - was reported to have risen to 54.2 in December from 51 in November, a six-month high, on the back of a spike in factory output and new orders from domestic and international firms. It was also the biggest monthly rise since April 2009.

A reading above 50 indicates business expansion, while a reading below indicates contraction. The index came close to suggesting a contraction in September when it slumped to 50.4.

More heartening, the new orders index, a gauge of future output, jumped to 57.9 from 52.8 in November, its biggest jump in two years, indicating factories might be in for better days ahead.

The data becomes even more significant when you consider that manufacturing activity across developed economies continues to shrink. Even in China, factory activity is believed to have contracted in December, after languishing mostly below 50 since July.

Another piece of good news: car sales for December rose 7.2 percent from a year ago, according to _ Business Standard _ , indicating a slight revival in demand. Heavy discounts and fears that car prices would be hiked again soon prompted some buyers to hasten their purchases.

Only Maruti Suzuki and Honda Siel suffered a drop in sales. Maruti, the country’s largest car maker, continued to suffer the effects of repeated production disruptions caused by restive labour, while Honda was hit by a supply shortage caused by the floods in Thailand in October.

And finally, in a BBC interview , Reserve Bank of India (RBI) governor D Subbarao reiterated comments made by the central bank last month about a reversal in monetary policy. “From here on, we could expect reversal of monetary policy. But it’s difficult to say when that will take place and in what shape it will roll out,” he told the news channel. The RBI has raised interest rates 13 times since March 2010 in a bid to curb persistent inflation.

Take them all together - better factory activity, improved car sales and a central bank that is set to ease monetary policy - and it feels like the economy might be ready to turn a corner.

Don’t bet on it, though, because it’s much too early to make any predictions: as with all things related to the economy, there are several ‘buts’ attached to the data. Plus, what we have are just two data points.

True, factory orders seem to be gaining traction, but input costs remain relatively high. PMI data showed input prices grew at a slightly slower pace than last month, while the output cost index gained for the second month running. As a Financial Times blog post noted, the news on India’s PMI is “good news, but not good enough”.

High input costs are also troubling car makers, and most have already announced that they will raise car prices in January. How the price hike will affect sales going forward, we’ll have to wait and see. At the moment, even car makers, themselves, aren’t very optimistic about the near-term future. They believe sales will stay muted because of higher prices.

High input costs and a depreciating rupee (which increases the value of imported inputs) will continue to tighten the screws on economic growth (by raising overall prices and curtailing demand), leaving the RBI little room to implement large rate cuts.

But let’s not get too gloomy. After all, the New Year has begun on a slightly positive note, even though it remains to be seen whether the data represents an one-off or the start of a trend. The big question now is: when will the RBI cut rates?

For sure, the global economy remains uncertain as ever but at least domestically, there’s hope that things won’t get much worse.