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Economy: The growth driver

Feb 12, 2004

The 'feel good factor' is in the limelight these days. While there are debates about how real is this 'feel good factor', on a broader basis, the latest GDP forecast of over 8% (CMIE) is only adding to it. This has had a positive impact, rightly or wrongly on the stock markets as well. Let us take a look at the factors that have contributed to higher GDP growth estimates for FY04 and try to ascertain whether this growth is sustainable going forward.GDP of the country is contributed by three sectors namely agriculture, industry and services. Agriculture covers production of both food grains and cash crops. The industrial side covers areas like electricity, mining, metal industry, cement, capital goods, automobiles and some part of textile industry. Services include many areas including financial services, IT services, trade, travel and tourism, transportation etc.

As can be seen from the chart above, GDP growth has had a high degree of correlation with the performance of the agriculture sector. This is mainly because of the dependence of a significant percentage (nearly 65%-70%) of the Indian population on agricultural income. While over the years the contribution from this sector has declined to GDP, in terms of the magnitude of impact on the overall economy per se, the importance of the agricultural side cannot be underestimated.

The sectoral break-up of expected growth in FY04 also proves the same point. The industrial and services sector are expected to grow at 6.1% (6.4% in FY03) and 8.3% (7.1% in FY03) respectively in FY04. Agricultural sector, on the other hand, is expected to grow at 10.7% in 2004 as compared to last year's decline of 5.2%. Looking at the reason for higher growth rate in agriculture, we realize that the projected increase is due to higher increase in area under cultivation and not because of major increase in productivity. Therefore, good monsoon has benefited this sector in FY04. Given this backdrop, what has changed in the last one year or so is just that we have had good monsoon and therefore higher output on the farming side.

We believe that it will be difficult to sustain the growth rate of 8% in GDP in FY05. In order to grow at same pace, we need a good monsoon and further growth in food grain production has to be accompanied by productivity improvement. If growth in GDP were to slowdown, corporate sector is likely to feel the pinch in FY05, although there could be a positive impact on demand in 1HFY05 due to the lag effect of good agricultural sector performance in this fiscal. So, if one is betting on the fact that the days of Indian economy growing at 6%-7% are over, it may not be realistic. From here on, lot of things have to fall in the right direction for India to grow at a sustainable rate, without any inflationary effect.

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