This sector will propel 8% GDP growth

Feb 20, 2010

In this issue:
» India's dubious distinction on the retail front
» EAC calls for a withdrawal of stimulus
» Real estate players back to their old ways
» Nouriel Roubini predicts more gloom
» ...and more!

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Agriculture has been a major spoke in the wheel for India's growth in FY10. With monsoons playing truant, agricultural production was hit hard. And the timing could not have been more inopportune. After all, India had begun to shake off the ill effects of the global financial crisis. The shortage of food meant that prices went through the roof, inflation soared and the government along with the RBI started getting jitters. However, strong growth in services and industrial production has saved the day in the fiscal so far.

Interestingly, the Prime Minister's Economic Advisory Council (EAC) is of the belief that a revival in farm output in the next fiscal will help the Indian economy move closer to the 8% growth rate it clocked in the boom years. This is notwithstanding the serious threats of financial market instability and rising prices. More importantly, it believes that the Indian economy may return to its trend growth rate of 9% by FY12. But this estimate hinges on the agricultural sector which is expected to grow by 5% in FY11 as compared to the projected decline of 0.2% in the current fiscal. This is assuming that monsoons do not disappoint. In the meanwhile, industry and services sectors are expected to grow at 8.7% and 8.8% in FY11, not much change from the growth expected this fiscal.

The stupendous growth in services and manufacturing in India in recent times in some sense has put agriculture in the backseat. But the recent rise in food prices has been tantamount to the fact that this sector cannot be ignored. We believe that agriculture still continues to be a major contributor to the country's GDP and its strong performance next fiscal could certainly ease the pressure on the government, the central bank, the corporates and more importantly the 'aam aadmi'.

 Chart of the day
While India has been striving to make its mark in the global arena in many fields, there is one area where it certainly would not have liked to top the list. As today's chart of the day shows, India has earned the dubious distinction of having the highest retail losses (as % of total sales) due to worker and supplier thefts, shoplifting and accounting errors. Of course, this probably pales in comparison to the larger issue of corruption that plagues the country. But the country certainly cannot afford to undermine the seriousness of such issues whatever the scale.

*For the year ended June 2009

Data Source: The Economist

Stressing on the need for fiscal consolidation, the Prime Minister's Economic Advisory Council (PMEAC) has given a stern warning to the government. That of ending its generous streak of political goodwill and rolling back the stimulus without further delay. It has also advised cutting back expenditures without hurting capital spending on infrastructure. These guidances seem well timed as the Finance Ministry gears up to announce the fiscal planning (Union Budget) next week. With a hike in excise duties and taxes being almost certain, Indian Inc. needs to temper down its profitability estimates for the near term.

Here's an interesting piece of trivia for you. As per reports, real estate major Unitech, which has constructed 35 m sq ft of residential projects since it started off operations in 1986, has launched 24 m sq ft in just the first nine months of the current fiscal FY10. Many other realty biggies too have similar bold plans. Add to that the fact that as per a DNA Money report, prices in several cities have started appreciating significantly. Thus, the logical question that arises is that with burgeoning inflation, rising interest rates and a likely roll back of the lax policy by the government, will demand be able to keep up with such a supply glut?

Real estate companies in the past have proven themselves to be an over enthusiastic lot. Most companies' business models in this industry have elements of both business and speculation. While they have paid the price of having such an attitude in the last one year, they seem to back to their old ways. But this time, with investors much more skeptical of investing in the industry than they were in 2008, the danger is twofold. One is of demand, supply and price dynamics moving unfavourably. The second is that of delayed execution of projects of such a large scale.

Picture this. You have been spending huge amounts from your credit card for purchasing any and everything thing you fancy. This goes on for quite a few years. Suddenly, you realise that your job isn't as secure anymore and the economy you live in is in a tailspin. Additionally, it hits you that the huge bills you have been racking up have now turned into a tower of debt staring you in the face. What do you do? You immediately start look for ways to cut back on your expenditure in a big way. You start making compromises on everything that involves spending money.

Well, what applies to individuals and households, also applies to entire economies. And most developed countries are now facing exactly the same problem as described above. In technical terms, referred to as 'deleveraging'. In fact, renowned New York University professor and economist Nouriel Roubini has recently gone as far as to say that the world faces the serious risk of a double dip recession. What with so many people all deleveraging together, the economies of these countries have gone for a toss. The lack of spending by citizens is being artificially replaced by governments currently in the form of stimulus packages. However, in economics, as in real life, there are no free lunches. By doing this governments have already racked up budget deficits of mammoth proportions. As and when they reach their spending limits, it wouldn't be surprising to see the world economy slipping back into a state of depression.

Gold prices had enough fundamental reason to surge over the past few months. First its positioning as a long term inflation hedge made it the most sought after investment in potentially inflationary times. Second, the weakness in the US dollar touted bullion as an alternative safe haven. Third, volatility in global stock markets encouraged investors to look for other safer investment avenues and drew them to the yellow metal. But most importantly, the perceived willingness of central banks to buy tonnes of gold from the IMF at reasonably high prices evoked optimistic targets for this asset.

However, the IMF's long-planned sale of its 403 tonnes of gold has now taken on a new twist that may chip away at one of the fundamental drivers for higher gold prices. The IMF's strategy to capitalise on surging gold to raise new resources for lending was first announced in 2008 and had been comfortably received by the market. Particularly with expectations for enthusiastic takers amongst Asia's central banks. Its sale of 200 tonnes of this quota to India and small disposals to Sri Lanka and Mauritius prompted a frenzy of speculation over further sales. Infact the central bank activity has been seen as a key foundation of gold's ability to rally even as other fundamentals, such as dollar weakness, faltered. However, if the central banks get wary of buying gold at unattractive levels, it will be interesting to see if gold prices manage to retain momentum. Meanwhile, gold will continue to remain an important asset class to have in one's portfolio, provided one does not go overboard with it.

The world markets ended on a mixed note this week. While most of the Asian markets ended on a weak note, Europe and the Americas recorded weekly gains. Asian markets ended with weekly losses, as investors were concerned over inflation and the withdrawal of stimulus programs. The Federal Reserve raised the discount rate by 0.25% to 0.75%. While this is the first increase in discount rate after three years, the move widens the rate's spread over the benchmark federal funds rate, which is currently 0.25%. The Fed believes that it will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs. There is now a wide consensus amongst bankers and economists that the urgency of monetary tightening will soon dawn upon the Fed.

However, India managed to end the week on a positive note, ending higher by about 0.2% over the previous week. Hong Kong was the top loser this week, ending lower by about 2% followed by Singapore, which ended marginally lower. Chinese markets were closed this week on account of the Lunar New Year. Amongst the top gainers were France (up 5%), UK and Germany (up 4% each). US and Brazilian markets ended the week higher by about 3% each.

Source: Yahoo Finance, Kitco

 Weekend investing mantra
"It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard" - Warren Buffett

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6 Responses to "This sector will propel 8% GDP growth"

jose k k

Mar 18, 2010

There may be 8%.but we shall note that unless an improvement in agricultural sector is not taking place the system will not improve.


Ramchandra Naik

Feb 21, 2010

Along with the need for good rainfall to propel agricultural growth, the government also needs to ensure that there is proper infrastructure in reaching the farm goods to the market. This will help increase agriculture productivity and will also ensure that the sector grows at higher rates than those seen earlier.



Feb 20, 2010

Dear Sirs,
This refers to the Chart of the day - Retail Losses
In India dishonesty starts from the top - the political leadership - and unless that is cleaned up, there is no future for the country. But can it ever be cleaned up with our kind of "Democracy"?



Feb 20, 2010

In India, black money is on the rampage because of politicians,corrupt officials and greedy businessmen.Our goverment is inefficient to tap the taxes fully and efficiently.So long this state of affair continues, there will be heavy demand for gold and real estate for the black money to hide,appreciate and come out when there is a need.News will come in papers about raid and capture of black money but no further action will be reported as the black money transfers from hand to hand to close the episode.



Feb 20, 2010

when government knows that already there are many factors affecting the gold price and pushing it up then what had induced them to purchase such a huge amount of gold from imf and that too at reasonably high price?? why they had purchased, to increased there reserves of gold or to make short term from profits??
if there is any one who can help me knowing this then do reply me..



Feb 20, 2010

indian groth in all sector minimum 8%

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