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Indian economy: Long term, bet on it

Jun 18, 2001

The global economy has slowed down rapidly over the last one year. Stock markets across countries have witnessed major corrections. Indeed, the excesses of the bubble period are increasingly becoming evident. The global unwinding is on in full swing. The signs are all ominous. Indeed they have been so for a number of months and the situation does not seem to be improving one bit.

India’s experience over the last four years has been quite different. Unlike the US, where the boom was investment led, India did not witness much increase in investment activity. Indeed, FY98 and FY00 witnessed a sharp slowdown in the domestic capital goods sector. During the second half of FY01, the sector recorded de-growth in four months. Even imports of capital goods slowed down considerably over this period. The investment slowdown shows no signs of bottoming out.

Overall economic growth in India during FY98 – FY01 has been in the range of 6.0 – 6.5%, significantly below the 7.0 – 7.5% growth recorded between FY95 and FY97. The saving grace in recent years has been the services sector, which has continued to grow at a robust pace.

Services: Rock solid
% growthFY95FY96FY97FY98FY99FY00FY01
Agriculture (%) 5.0 -0.99.6-1.97.1 0.7 1.2
Industry (%) 9.2 11.8 6.0 5.9 3.4 6.4 6.1
Services (%) 7.0 10.3 7.1 9.0 8.2 9.6 8.1
Base Year: 1993 - 94 = 100
With the domestic and global economies not displaying the kind of resilience they once did, stock markets have become more cautious in their outlook. Added to the overall economic weakness and the hangover of the TMT meltdown, there is the issue of some fundamental changes in the way in which stock trading takes place in India. This has added to the uncertainty. Indeed, the combined average turnover of the BSE & NSE has declined by over 65% from a high Rs 120 bn per day. The lack of interest is showing. The BSE Sensex is close to testing a new low.

These are the broad developments that the markets have been focusing on over the last few weeks. The lack of interest, or rather the bearish sentiment, is evident. However, are these developments reason enough for an investor to liquidate his stocks portfolio? Probably not for the long-term investor.

The reason for the excess supply of stock in the market is the nearing of the deadline for the end of Badla/ALBM and the commencement of rolling settlements. By the 2nd of July a significant portion of the outstanding positions (which are net long to the extent of Rs 8 bn) will need to be squared off. Another reason for the negative sentiment is that in the near term there is unlikely to be any positive economic news (the impact of the monsoon on demand is still a few months away). Then there is spillover effect from the NASDAQ, which will continue to have ramifications for the markets.

Probably you have noticed that all these are short-term factors i.e. something that the long-term investor does not have to worry too much about. Rather this short-term uncertainty may be a buying opportunity. Ofcourse, it is uncertain how much more the markets will fall and whether the timing is right or not. But then, timing is not the critical issue, valuations and long-term prospects are.

There is little dispute about the long-term prospects of the Indian economy. As the country’s fiscal health improves and interest rates decline, investment activity would get a much-needed boost. Steadily rising FDI would further contribute to this. Better infrastructure, for one, will greatly benefit the economy in terms of better productivity.

Then there is the services sector (over 50% of economy) and talk of India becoming the back office of the world. Indeed, this sector will be a key contributor to growth in the coming years. The software services sector, which is included under the services group, too will be a key contributor to growth as it gains critical mass.

The Indian economy is undergoing a transition, which when completed, should see its sustainable real growth rate (after removing the effects of inflation) improve to over 7%. With population growth at 1.9%, this would imply a per capita income growth of 5.1% per annum (again, after removing the impact inflation).

Rising employment and better wages (a result of higher productivity) should trigger the much touted consumption boom in the country. Rising consumption and an improving investment climate should help India register much higher growth than in the past.

The stock market is a barometer of the economy’s performance. Will it be long before it begins to factor in a brighter future?

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