Economy: Just a reminder!

Take the nature of events that have unfolded since January 2004. Starting with the BSE Sensex breaching the 6,000 levels, tensions in the Middle East, impressive corporate results, 'unexpected' results from general elections, disinvestment imbroglio, common minimum programme, and now the general budget. Amidst all these events, the country has had a favorable pre-monsoon showers and the industrial sector performance continues to remain impressive.

After a stellar performance in FY04, the Reserve Bank of India (RBI) has pegged the country's GDP expectations at 6.5% to 7.0%. While the rate of growth is lower compared to what was achieved in FY04, one has to keep in mind that last year's performance was also on account of lower base effect from a poor agricultural crop in FY03. The RBI's growth estimate for FY05 is based on the premise of a normal monsoon, sustained growth in the industrial sector and good performance on the exports front. As per the initial data, as of now, all the three legs of the assumption are on a firm footing.

First, let us consider the monsoon factor. As per the Ministry of Finance, almost 67% of the country's meteorological divisions have witnessed normal or excess rainfall in the pre-monsoon season (i.e. from March 1st to May 15th). As is evident from the graph above, this year's pre-monsoon showers are even better than that of FY03 and is slowly tracing back to the good days of FY97 and FY98. Having said that, one has to wait and watch how the Southwest monsoon actually progresses over the next two to three months before taking a final view.

Now, as far as the industrial sector performance is concerned, as is evident from the table above, the momentum seem to be continuing with the manufacturing sector growing by 9.4% in May 2004 on a YoY basis. One important factor to be noted is the performance of the capital goods sector, which grew by almost 17.0% in March'04, which is among the highest that one has seen in the recent past. Performance of the capital goods sector and capital goods imports are factors that are considered lead indicators of industrial sector performance. At the moment, they are favorable.

The third factor i.e. exports have grown by 19.9 % in dollar terms in the month of April 2004 as compared to the 4.6% growth that was witnessed in the corresponding month of FY04. Imports, on the other hand, have grown by 20.8% during April 2004 as compared with 32.8% last year. One important thing to note about India's surging exports is that this growth has come in the face of an appreciating rupee, which is generally considered to be one factor that makes exports uncompetitive. However, the way Indian companies have restructured their business models over the past few years, the appreciating rupee has not had a major impact.

While the abovementioned factors have played very important roles in the overall growth of the Indian economy in the past, sustainability is still a key question. And for that, investments (both pubic and private) have to improve significantly from the current level to provide a strong platform for the country's economic growth.

The graph above clearly indicates the fact that, over the past few years, while asset creation has been on a constant decline, there has been a growth (though volatile) in the sale of the manufacturing sector. When seen in context of the present growth in the manufacturing segment (See graph "Sign of good times?' above), we believe that investments are likely to show sharp improvement starting FY05. As one may notice, corporates have announced significant capex plans for the next five years.

As seen from the strides taken over the past decade, we believe that the Indian economy is in a strong footing. Perhaps the areas of apprehension are the impact of high crude prices on the country's fiscal situation and the consequent impact on interest rate in the short-term.

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