Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Economy: Two things to watch - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Apr 26, 2001

    Economy: Two things to watch

    Over the last three years or so, the Indian economy has witnessed a slowdown in growth. Actually, stagnation would be a better word for it. Surprisingly, all three sectors viz. agriculture (24% of GDP), industry (21.9%) and services (54.2%), have failed to accelerate. Infact, save for manufacturing (which has stagnated), the other sectors have witnessed a slowdown in the growth rates.

    India may have done well for itself in the context of a global slowdown. By some accounts we are among the fastest growing economies in the world. But, we are nowhere close to achieving sustainable levels of 8% growth and above. The Prime Minister can talk of higher growth rates but facts state otherwise. The slowdown is fundamental, as is reflected in the slowing rate of capital formation. Moreover, growth in the capital goods sector, another indicator of economic activity, has recorded a growth of just 2.1% during the first eleven months of FY01 (6.6% in the corresponding period last year). Compare this with the 12.7% annual growth recorded in 1999 and the gravity of the situation becomes apparent. Any speculation that imports may be meeting the demand for capital imports too can be put to rest by taking a look at the declining non-oil import numbers (down over 12% YoY in February 2001).

    The purpose of this article however is not to generate gloom. We will look at two factors that will probably play a significant role in the turnaround in the economy and support a higher growth rate in the years to come.

    First is the booming construction sector (5.2% of GDP), which has continued to register growth despite the overall slowdown. There are two ways to look at this. First, increasing construction activity gives the picture of more employment, more consumption of cement, steel and the like. This will generate demand in the economy. Second, infrastructure will account for a large part of the construction activity. More roads, better ports et cetera will benefit the economy by supporting a higher level of economic activity.

    Second, and a more important factor, is the softer interest rate environment that has been ushered into the country (though its sustainability is subject to the government's borrowing appetite, but that is better left for discussion at a later date). Lower rates impact the economy in several ways. One cost of capital declines, thus improving profitability and making investment activity relatively more attractive. Two, lower borrowing costs support a higher level of consumption activity as financing costs decline.

    Both these factors have the potential to kick off an urgently needed virtuous circle: more demand for goods and services higher investment activity to meet this demand rise in incomes as employment rises more consumption as more people are employed (this in turn supports higher investment activity). But the small size of the overall construction sector and the recent cut in interest rates may not have an immediate impact on growth. However, as lower rates trickle to the bottomline and spur investment activity and the construction industry gains momentum, India stands to benefit significantly.



    Equitymaster requests your view! Post a comment on "Economy: Two things to watch". Click here!


    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms