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Economy in trouble

Apr 1, 2003

As investors enter into the new financial year i.e. FY04 the state of the Indian economy will be the biggest factor investors will have to contend with in order to make their investment in equities. The latest figures for GDP growth have been released and they have justified the fears of a fall in GDP mainly due to lackluster agricultural growth. The GDP growth rate has fallen to 2.6% in the third quarter FY03 compared to 6.3% growth in the same period last year. In the third quarter, agriculture, forestry and fishing component of GDP has fallen in value by nearly 8%. What is heartening is the fact that other components of GDP like manufacturing, services and construction have shown very healthy growth in value thus in a way compensating for the poor performance of the agricultural sector. While the manufacturing sector has shown over 6% growth in the third quarter, the services sector growth has been even better at over 7%.

Even the construction industry has seen robust growth. Though almost all the other components of GDP have shown a robust growth the dependence on agriculture is very clear. With the estimates of the Rabi crop indicating that there may be a decline in the same, we may expect a lackluster fourth quarter FY03. While the central statistical organisation has pegged the GDP growth for FY03 at 4.4%, the average of the first three quarters stands at 4.8%. That means that the organisation is assuming a GDP growth of near about 3% for the fourth quarter.

With the Gulf war rearing its head in the fourth quarter even this growth seems very unlikely. Especially, the services sector is expected to suffer the most due to the onset of the war in Iraq. With the US economic growth showing signs of a slowdown even before the war started, the fate of Indian exports is bleak even if the war is over soon. Exports to the US represent over a quarter of total Indian exports. The central government too has been unable to control its expenses, which will have a further adverse effect on the economy.

The fiscal deficit figures released by the Comptroller General of Accounts indicates that fiscal deficit of the center stood at 4.7% at the end of February. This may look encouraging but it must be viewed keeping in mind the fact that most of the expenses of the center are made in March. This means that the government is on track to breach the revised budgeted fiscal deficit of 5.7%. All in all the economic prospects for FY04 look very challenging, and until there is a significant revival in the fortunes of the global economy sentiment towards the stocks markets are likely to remain lackluster and largely news driven.

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