Economy: GDP Vs Nifty - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Economy: GDP Vs Nifty

Oct 6, 2003

One of the things that the markets are positive at the current juncture is good monsoon and its positive impact on the Indian economy in FY04 and FY05. While expectations for GDP growth in FY04 range from 6% to 6.5%, it is pertinent to understand how it impacts corporate profitability. In this context, the sectoral composition of GDP viz. agriculture, industry and services is of significance. Here is an attempt to see how far the sectoral composition of India’s GDP mirrors the sectoral composition of Nifty. It has to be remembered that the weightage is based on market capitalisation.

Agriculture:  There has been a fall in the share of agriculture in the overall GDP (29% in the 1990’s as compared to 36.4% in the 1980’s). It further dropped in FY03 and stood at 22.2% of the overall GDP. The drop in contribution in FY03 is on account of the fact that the country witnessed one of its worst droughts in the last decade. Though agriculture contributed to 22% of GDP, over 70% of the populace depend on this sector for income. As a result, the performance of the agricultural sector is vital for the country. Given the fact that the country has had four years of uneven rainfall, sectors that depend on higher spending by rural areas like FMCG, auto and consumer durable have been affected significantly.

The sector companies contribute almost 15% to the overall market cap of Nifty and bulk of it is contributed by FMCG biggies such as HLL and ITC. The rate of growth for HLL on the personal care and foods segment has been negligible in the last four years. ITC, on the other hand, has managed to grow its sales at a CAGR of 15% since FY00 primarily led by new ventures. Barring two-wheeler companies, auto sector, as a whole, was faced with lackluster demand till September 2001. Passenger car sales have remained stagnant at 600,000 units per annum since the highs of FY00. Given this backdrop, it is apparent that agricultural sector plays a vital role in increasing income at the hands of the populace.

Reduced dependence on weather gods (the irrigation project), improvement in rural infrastructure (easy access to markets), availability of finance and land reforms hold the key if the sector has to realise its full potential. Much of it has started in a limited way. Going forward, the FMCG companies are likely to be the key beneficiaries of economic growth as rising incomes will drive demand in this sector. Therefore, in times to come, the sector is likely to contribute more to the overall market capitalisation of Nifty.

Manufacturing:  FY03 witnessed an increase in industrial activity and grew by 5.8% as compared to 3.2% growth in the previous year. Acceleration in government spending on infrastructure, increase in exports, softening of interest rates and increasing business confidence have played a part in the sector showing recovery in the recent past post the peak in mid 1990s. Increase in construction activity also helped certain industries like steel and cement.

The sector contributed the maximum 48.4% to Nifty’s market capitalisation. Commodity manufacturers and companies from energy sector are the key contributors. Infrastructure bottlenecks remain the major impediment to improved growth in the sector. However, this factor is expected to lose relevance in the long term. This should provide big thrust to the manufacturing sector as a whole in the long term.

Services:  Since the 1980’s, growth in the Indian economy has been supported by a robust growth in the services sector. In fact, in times of adverse agricultural output and declining industrial production, the services sector has provided the much-needed resilience to the Indian economy and accounts for 56% of India’s GDP in FY03.

In FY03, the sector contributed almost 88% to the overall growth of 4.4% in the GDP. 'Trade, hotels, transport and communication' services is the main sub-sector within the services sector and constitutes almost 43% of services sector GDP. This sub sector has experienced high growth rates since the 1990s mainly on account of robust growth of communications, which in turn benefited significantly from the reforms underway in the telecom sector.The communication sector grew at an impressive rate of 21% during 1998-2002, with its share in GDP doubling by FY02. Going forward, the Indian economy will continue to remain services intensive and its sustainability in the medium term would depend upon the emergence and growth of information, communication and entertainment services. As Dr. Marc Faber puts it ‘India could do to the US and Western Europe in services what China did to the US in the manufacturing sector’.

The service sector companies contributed almost 37% to Nifty’s market cap with 30% being contributed by the software and banking stocks alone. The increasing efforts by the Indian software companies to move up the value chain and also to acquire companies to add pace to the topline growth is likely to keep the momentum going.

While selecting stocks, investor’s have to keep these factors in mind. Instead of just banking on the fact that ‘GDP is expected to grow faster’, it is pertinent to understand ‘which sectors are likely to benefit the most’. This could make investing in stock less cumbersome.

Equitymaster requests your view! Post a comment on "Economy: GDP Vs Nifty". Click here!


More Views on News

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

ONGC to NMDC: Here are 5 Stocks Value Investors Should Closely Track (Views On News)

Nov 26, 2021

Before investing in value stocks, research the company and gain insight into why the market is discounting it.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

Watch This Before You Buy NBFC Stocks (Fast Profits Daily)

Dec 3, 2021

My view on NBFC stocks.

Charlie Munger: This is "Even Crazier" than the Dotcom Era (Views On News)

Dec 3, 2021

Is the investing legend's pessimistic view on the stock markets justified?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 3, 2021 (Close)