Reserve Bank of India (RBI) has released its annual report for the year ending June 2004. RBI's annual report provides a detailed review of the economy as a whole. Let us take a look at the key points that emerges from the RBI report.
Economic growth, measured as the growth in the Gross Domestic Product (GDP) stood at 8.2%, the highest growth rate in the last 15 years. The agriculture sector was one of the key growth drivers, reporting a growth of 9.1% against a negative growth of 5.2% last year. The services and manufacturing sectors continued their growth momentum and grew by 6.8% and 8.5% respectively.
|Mining & Quarrying
|Electricity, Gas and Water Supply
| Trade, hotels and Restaurants
| Transport, Storage and communications
| Financing, insuarance and Real Estate
| Community, Social and Personal Services
The agricultural sector growth should be seen in line with a decline seen in the last fiscal due to a poor monsoon in that period (FY03). The Indian agricultural economy is still dependent on the vagaries of Monsoon and a bad monsoon can be very detrimental for the growth of the sector. Also lack of investment in the agriculture sector by the government has led to this over dependence on the monsoons. The gross capital formation by the public sector (read government) in agriculture has actually gone down in last few years, and the private capital formation has gone to certain naturally endowed areas. With the new government focused on spurring agricultural growth, we may see a spurt in public investment in agriculture sector, which is a good sign for long-term sustainability of growth in the economy.
In the manufacturing sector growth was seen in electricity, gas and water supply sectors. Higher capacity utilization by the industry has also helped several manufacturing industries. Rebound in the rural demand, rising exports across a spectrum of industries, increased consumer durables demand fuelled by low interest rates and reduction in excise duties on a host of intermediate inputs can be listed as some of the key reasons for this robust growth.
The services sector grew at a faster rate compared to the previous year. This is a good sign of the maturing and diversification of the Indian economy. The share of commodity products in the economy is coming down which is a good sign, as it will insulate our economy to some extent from the vagaries of the commodity cycles. However, the sustainability of high growth of services would depend upon high quality of production and delivery. Services need continuous improvement in productivity and pro-active responses to the supply side in markets where tastes and patterns change rapidly, which is particularly true for the services industry.
On the monetary front RBI had to manage a high liquidity environment during the period, thanks mainly to huge inflows of foreign capital in to the country. The forex reserves situation was particularly strong in the year based on several fundamental parameters. Considering the huge forex reserves the RBI allowed an investment of upto US$ 25,000 to the Indian citizens to invest in foreign stocks. It has also raised the foreign currency limits for Indians going abroad. The money supply increased by about 16% in FY04, which was commensurate with the growth of the economy. Inflation continued to remain in control and the year ended with an average inflation rate of 5.4%, which is good in context of Indian economy, which has always been one of the high inflation economies.
Credit off-take remained somewhat subdued as bank finance was substituted by internally generated funds and cheaper funds raised overseas. The demand for bank credit picked up only in the latter half of the year. Bank credit grew by 15.3% in FY04, while the non-food credit segment grew by 18.4% in the same period. While electricity, textiles, food processing, gems and jewellery, construction and infrastructure were the major sectors that saw growth in credit off-take, credit to steel, mining, fertilizers, petrochemical, petroleum sectors however remained lower than last year.
On the savings front the gross financial savings by the household sector has increased in FY04 from 13.6% of the GDP to 15.1% of the GDP. The figures of non-financial savings are not available. The major increase has come in the form of deposits with banks. While bank deposits account for about 43% (up 20.3%) of the total financial savings by the household sector, share of equities has actually fallen from 0.8% in FY03 to 0.7% in FY04 despite the bullish stocks markets seen in FY04. The picture is even grimmer if one were to go further back in time. The share of equities in household savings has come down from about 8% in FY95 to 0.7 in FY04. The growth in savings rate is a healthy sign for an economy, as higher savings will provide capital for fueling higher growth in the economy.
On the external sector front FY04 may be termed as a dream year for the country, as the foreign kitty of RBI swelled by almost 50% to US$ 112 bn, which covers our imports requirements of about 1.7 years much more than the prudential norms. The major chunk of the capital inflow was on account of portfolio investments, which was about 51% of the total capital inflow. FY04 ended with huge capital account surplus, which can be attributed to huge remittances by the Indian's living abroad. The private transfers increased by more than 20%, earnings from the software services sector, which was again major contributor, increased by 27%. However, the trade balance worsened due to higher import of capital goods and petroleum products.
Overall from the RBI report it can be said that FY04 was a dream year for any central bank or for that matter any economy. The Macroeconomic and monetary environments were stable, there was healthy credit off-take, and external sector helped RBI to garner huge forex reserves. The Indian economy is entering another investment cycle and its effects will be felt in the next 2-3 years as companies complete their capital expenditure targets. FY05 is likely to be a challenging year due to poor monsoons as well as higher inflation threatening to derail the growth of the Indian economy. Investors, thus, need to decide upon a long-term horizon so that this current growth uncertainty is mitigated to an extent. Considering that the new investment cycle is about to begin this may be the right opportunity to take a long-term view on certain sectors and specifically stocks in these sectors.