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1QFY07 GDP: The engine chugs along!

Oct 5, 2006

If stock market observers were left perplexed over the resurgent bull rally of the past few months, then the 1QFY07 GDP numbers would have surely done enough to help dust off those cobwebs from their minds. Taking global factors such as a rise in crude oil prices and interest rate hikes in its stride, the Indian economy has grown by an impressive 8.9% during 1QFY07 as compared to the same period last year - yet another instance of one of the fastest-ever growth rates recorded in GDP since the late 1990s. Well begun is half done and this indeed puts the country firmly on track to celebrate FY07 as yet another 8% GDP growth rate year, barring an unconceivable disaster of epic proportions.The services sector continues to be a source of great comfort and this sector once again emerged as the contributor-in-chief by growing at a rate of 10.5% YoY. Within this sector, trade, hotels, transport and communications turned out to be the trump cards, as growth in these sectors increased by a hefty 13% as compared to 1QFY06. Indeed, with tourism on the rise and more and more people hooking onto mobile phones, the robust growth in these sectors has hardly come as a surprise. With credit growth in the region of 30% and a stable interest rate environment, growth in the financing, insurance, real estate and business services sectors has also grown by a commendable 9% YoY and contributed towards the overall growth in the services sector during 1QFY07.

Although the country is not known for its manufacturing prowess, given the fact that the sector accounts for just 17%-18% of the country's GDP as compared to close to 40% for countries such as China and Thailand, the sector is slowly but steadily emerging as another growth engine of the economy. The sector has turned out to be the highest grosser during 1QFY07, growing at 11% YoY. Its contribution to the overall growth, however, was limited, owing to its relatively smaller contribution to the country's GDP. An impressive 20% growth in exports was the main driver of this sector. Had it not been for the sedate performance of the electricity and construction sectors, growth in the manufacturing sector would have been even higher.

The modest performance of the agriculture sector continued to weigh on the economy, thus pulling down the growth numbers a bit. Though the sector's growth remained at last year's level of 3% YoY, it is expected that production figures could fall later in the year, as the first quarter figures are usually based on the total land under cultivation. However, notwithstanding this blip, the economy seems well on its way towards achieving the 8% growth in GDP.

While the robust growth in the economy augurs well for the country's stock markets, as it results in higher demand for goods and services, the effect is not uniform across-the-board, owing to the dynamics of individual industries and competitive forces within each industry. Thus, qualities such as the ability of a company to pass on price hikes to the consumer, the degree of prudence involved in the management of capital, usage of economies of scale and management quality all come into the picture after one has evaluated the overall macro economic scenario.

Therefore, while macro analysis might be a good starting point, careful analysis of the above-mentioned points is just as important. Above all, valuations should be given due consideration, as the returns one might get are purely a function of the price that one pays at any given time. While prospects on the macro level look bright, a proper risk-return analysis at the micro level, especially at times such as these where valuations have become a concern, is of the essence.


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