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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.

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