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Mid term economic review: A recap - Views on News from Equitymaster
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  • Nov 17, 2003

    Mid term economic review: A recap

    The mid term economic review announced by the Finance ministry has projected a GDP growth rate of 7% in view of the strong fundamentals of the economy. In this article, let us see the reasons behind the optimism.

    With close to 70% of the populace still depending on the agricultural sector for its livelihood, it is only natural that when the rain Gods oblige, the confidence and the feel good factor percolates down to the other sectors of the economy. Therefore, when 32 out of the 36 meteorological sub divisions in the country received normal to excess rainfall, the policy makers started penciling in a high GDP growth rate. And this is not without reason, as the sector, which last year made a negative contribution to the GDP, is expected to grow by around 8% on the back of an impressive 20% growth in the 'Kharif' food grain output. The overall food grain output is also projected to reach a new high of 220 m tonnes beating the previous best of 212 m tonnes, achieved in FY02.

    Owing to the interest rates being at an all time low, on account of high liquidity in the markets, the average Indian is spending on cars and houses with a renewed vigor and this has helped key infrastructure industries like steel, cement and automobiles post a robust growth. The steel industry has grown by nearly 39% in April-August this year as compared to the previous year on the back of strong demand in both domestic and international markets. While China is fueling the global growth story, the government initiative in the infrastructure sector and a buoyant housing sector demand is aiding growth in the domestic market. Although, the cement industry grew by a modest 5% on account of prolonged monsoons, the second half of the current year is expected to bring in a higher growth rate for the industry.

    Automobile sales have also posted a growth of nearly 8% in April-August this year as compared to the previous year and this is expected to further increase in the second half of the year. Exports have also grown by a healthy 68% during the same period. Moreover, the auto component industry is also witnessing a period of high growth as global car makers like Ford and Daimler Chrysler have been increasingly looking to outsource components from low cost destinations like India in order to improve their margins.

    In addition to these, other industries such as FMCG, consumer durables, electrical and the like are also expected to experience a rise in demand on account of increased disposable income in the hands of both rural as well as urban consumers. Not only this, the services sector is also expected to post a robust growth and continue making the largest contribution to the Indian GDP, in line with the trend in the developed nations.

    On the external front, while the appreciating rupee and buoyant growth in the economy, fueled a strong rise in imports, strong capital inflows, especially in the equity markets more than offset the imports growth and as a result the reserves were able to swell by another US$ 17 bn during FY04. The total reserves with the country currently stand at around US$ 93 bn and hence the balance of payment condition of the country remains strong in order to meet any eventuality.

    Thus, in view of the strong growth rates expected across the different sectors and strong external position of the company, the GDP growth projections have been revised upwards to around 7%, thus making India one of the fastest growing economies in the Asian region. That said, high level of fiscal deficit continues to remain an area of concern. With general elections coming up, policy decisions are expected to be people-friendly, pushing back economic considerations for the short-term. The magnitude of impact of such decisions remains to be seen.



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