• NOVEMBER 17, 2004

Economic data: Mixed but optimistic picture

Economic data is key to any investment decision and is relevant for any and all economies across the globe. And if the data is of one of the fastest growing economies in the world (India) it's relevance cannot be overemphasized. During last week we saw certain key economic data being released and these data point towards a healthy economy that is on a higher growth trajectory. We have listed a few of the key points from the data and tried to analyse the implications of the same.

Monthly economic report: Key points

  1. Industrial Index of Production continues to show a strong growth of 7.9% in the month of August '04 against 5.9% in the same period last year.

  2. Key drivers were manufacturing which registered a growth of 8.2% in August (6.7% in Aug '03) and electricity 7.1% in August (1.2% in Aug '04).

  3. The basic growth driver in manufacturing industry was capital goods segment, which recorded a robust growth of 15.4% as against 9.1% in the same period last year.

  4. The year-on year growth of gross bank credit as on October 15, 2004 was 28.8% (exclusive of conversion, 24.5%) as against 12% on the corresponding date of last year.

  5. The annual Inflation rate was 7.1% on the week ended 16th October 2004 against 5.13% a year ago.

  6. The revenue deficit of central government was 78% of the budget estimates for the full fiscal year 2004-05.

  7. The budget deficit was about 38% of the Budget estimate for the full year.

The above report shows a good picture of the economy except on the inflation and fiscal deficit front. Industrial production continues to show robust growth and seems to be maintaining the momentum seen earlier this year. The important point to note here is that the basic demand driver is the capital goods segment which witnessed a growth of 15.4%, backed by strong growth in consumer goods segment. This indicates an expansionary phase underway in the Indian economy. Many corporates are in middle of their investment plans and the growth in the capital goods segment is reflection of the same. Also, the growth in electricity segment was robust at 7.1%, which is good news for Indian economy, which has been facing a perennial power drought.

Another major factor that shows that there is expansion drive going on in the economy is the credit off-take figure. The gross credit off-take from the scheduled commercial banks has grown by 28% in the first seven months of this fiscal against 12% in the same period last year. The demand for capital is rising in the economy, which suggests that the investment cycle is strong and is likely to sustain for the medium term as most of the investment plans are spread over a 2-3 year period.

The most worrying factor in the in the report is the revenue deficit of the government. The revenue deficit has reached to about 78% of its budget target in first six months of this fiscal. With demand rising from the corporate segment and the increasing budget deficit of the government we are likely to see liquidity problems (unless FII inflows continue pick up at a faster rate) and this is likely to lead to interest rates rising on a faster than expected rate. Already, most banks are in the process of increasing interest rates (ICICI bank has increased both deposit and lending rates by between 25 basis points to 75 basis points).

On the inflation front the picture still is not very encouraging. Inflation has now touched 7.1% for the week ending 30th October 2004, which in lower than its peak of 8.4% earlier this year. However, with a dull monsoon period seen this year and rising global commodity prices we might see inflationary climate persisting for some more time. Though this inflation at this point in time is more a supply side function, if the economy grows at this rate and money supply increases incessantly we might see inflation sustaining at these levels even though the international commodity prices show some restraint.

What's in it for investors?
While the expansion of capacities across sectors is a good sign for the economy, rising interest rates might dampen the business sentiment going forward. Investors also need to keep in mind the fact that industries, which have expanded capacities, will take some time to utilize their full capacity and reach to the current level of profitability. At the same time, on the positive side we see that the Indian economy seems to be at an inflection point where the growth trajectory may be in for an upward correction. Significant investments flowing to the services sector and high paying jobs being created and rising aspirations of Indians may also play a defining role in the economic growth of the country. Let's keep our fingers crossed for a stable government and normal monsoons next year!

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