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  • : Look beyond FY04...

    Look beyond FY04...

    The Central Statistical Organisation (CSO), has finally come out with the long awaited advance estimates of the national income for 2003-04. The GDP growth that the CSO estimates for FY04, stands at 8.1% and may not come as a surprise to most economists and analysts in the country. The CSO indicates that strong agricultural and services sector growth has been one of the key drivers of growth for the Indian economy in FY04. What does this high GDP growth mean for the retail stock market investor?

    To understand the implications of CSO's estimates we need to dissect the Indian GDP and ascertain the key growth drivers of the same. There are three broad contributors to the Indian GDP, namely agriculture, industry and services. GDP growth in FY03 stood at a disappointing 4% and this was mainly due to the fall in the agri economy of the country (down 5.2% in FY03). In FY04 however, growth in the sector is likely to stand at 9.1% and this is one of the major contributors to the GDP growth expected in FY04. Good monsoons have led to this strong growth in the agricultural sector.

    Coming to the industrial sector, the growth in the same in FY04 (6.5%) seems to be a follow up of the growth seen in FY03 (6.4%). This time around the major contributors of this growth have been the manufacturing and the electricity, gas and water supply sectors (part of the industrial sector). The table below indicates the same. That said the services sector continues to record consistently strong growth year on year. For FY04, the growth is estimated at 8.4% compared to 7.1% in FY03.

    GDP growth rates 2001-02 2002-03 2003-04
    Agriculture* 6.5 -5.2 9.1
    Industry 3.4 6.4 6.5
    Manufacturing 3.6 6.2 7.1
    Mining and quarrying 2.2 8.8 4.0
    Electricity, gas, water supply 3.6 3.8 5.4
    Construction 3.1 7.3 6.1
    Services 6.8 7.1 8.4
    Trade, hotels, transport and comm 8.6 7.1 10.9
    Finance, Insuarance, real estate, business 4.5 8.8 6.4
    Community, social, personal services 5.6 5.8 5.9
    GDP at Factor Cost 5.8 4.0 8.1

    * Includes forestry and fishery
    Fig for 2002-03 are quick estimates;
    Fig for 2003-04 are advance estimates.

    But all these are historical numbers. The question now to be asked is whether these growth numbers can be replicated on a consistent basis in the next 3-4 years atleast. If one were to look at the GDP numbers and the correlation with the agricultural sector we would find that, for FY04 the GDP growth seems to be a factor of strong agricultural sector growth. Hence, the point we are trying to make here is that despite being a relatively smaller (25%) component of the overall GDP, agricultural sector continues to determine the overall GDP growth. Lack of predictability of monsoons and the resultant reluctance, of a majority of the population that relies on farm incomes to spend may be the main reason for the same.

    Since nearly 70% of the population continues to rely on farm incomes, they seem to be more predisposed to saving (even in a good yield year) rather than spending, as they are unsure of the next monsoons. This means that higher income for a majority of the Indian economy may not mean higher spending, which is key in any economy as far as sustaining growth is concerned. The need of the hour is to ensure that the rural economy is not overly reliant on monsoons for their incomes. This will involve large infrastructural projects that harness perennial as well as seasonal sources (monsoons) of water in an efficient manner. The government also needs to promote larger investments in the manufacturing sector that will generate employment on a larger scale than the services sector.

    The highway projects seem to be a step in the right direction, but similar projects have to be initiated in the power, irrigation, sanitation and telecom sectors. Coming back to the retail investor. The investor needs to understand that the performance of the stock markets depend a lot on the performance of the economy as a whole and to that extent the focus on economic activity should never be lost. While the CSO has given us good news regarding FY04, most of this is already in the valuations. What's cooking in FY05 and FY06 will largely determine the course of the Indian indices. The approach therefore, should be forward looking.

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