• JANUARY 8, 2002

Economic revival: Benign hopes

Markets received a spate of good news last week. On one hand, the rise in semiconductor demand gave fresh hope of a possible recovery in the technology sector. On the domestic front, higher cement despatches and auto sales eased concerns of slowdown in the economy to a certain extent. The markets seem to be positive of a better 2HFY02.

Now that the markets are hoping of an improved demand scenario in the second half of the current fiscal, we take a closer look at the quarterly GDP growth trend for the last three years and how things could shape up in 2HFY02. The graphical representation of GDP growth trend says it all.

Slower progress on the reforms front combined with a slew of natural calamities like Gujarat earthquake, flood in Orissa, West Bengal and Andhra Pradesh has subdued economic growth. Compared with 10.9% in 4QFY99, agricultural growth at -1.4% in 4QFY01 clearly reflects the effect of two 'normal' monsoons. Though the government declared monsoons as normal in the last two years, select regions in the Indian subcontinent received less than average monsoon (states like Gujarat, Rajasthan, Madhya Pradesh, Orissa and Andhra Pradesh are amongst the few of them). Since almost 70% of the Indian population of 1 bn relies on agriculture for their day to day living, rural demand has certainly been affected. Hindustan Lever's topline grew at a CAGR of 5.8% between FY99 and FY01 as against a CAGR of 30.2% between FY92 and FY98 (but one has to keep in mind that growth was also led by acquisitions).

There has been no good news on the industrial sector as well. Investments have remained lacklustre for almost five years now and successive finance ministers' effort on this front have failed to materialise. Despite interest rate cuts by the apex bank of late, entrepreneurs are hesitant to commit funds due to variety of reasons. Lack of demand in the domestic market and threat from imports would rank first and second in this list. The index of industrial production continued its downward trend in the first half of the current fiscal also.

The second half trend...
(% growth)AgricultureIIPServicesGDP

The slowdown is even more pronounced in the services sector, which accounted for as high as 54.2% of GDP in FY01. Starting from 3QFY00, services sector growth has waned in line with the slowdown in the global economy. As against a 9.3% growth in services in 4QFY00, growth in 4QFY01 at 6.3% puts forth the effect of the slowdown.

Given this backdrop and the historical growth trend, what does the second half of the current fiscal hold for the economy. On a positive note, the second quarter GDP growth at 5.2% in the current fiscal was higher than 4.4% registered in 1QFY02. This was led by higher agricultural output and improved performance of the services sector. Kharif output fared well in the current fiscal and the markets seem positive on the rabi crop as well. In that case, this would enable the Indian economy to grow at 5.5% in the current fiscal.

But as Mr. Mahesh Vyas puts it "A good monsoon followed by a good crop and a good farm income is certainly good news for the corporate sector. But one has to take this one set at a time. So we have had only one good crop season i.e. a kharif season and we have to wait for the rabi season to be good and the next one to be good to be sure that the farmers will spend more on industrial goods and services..."

The government is doing every bit to boost growth. In an effort to give a fillip to investments, it is planning to commit assured returns for private players in the infrastructure sector. This could be leveraged by the private companies to avail of bank and institutional finance. It has also opened foreign direct investment in the defense sector and increased FDI limit to 74% in the housing sector. Though these are some steps in the right direction, we still have a long way to go to reach anywhere near the GDP growth rate of 8%-9% per annum.

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