Skip to content

Indian Economy: The Long and its short

April 8, 2008

Some Markers

  • GDP grew at 8.4% in the third quarter (Oct-Dec 2007-08 ) as against 8.9% of same period in 2006-07
  • Index of Industrial Production(IIP) is showing a very high correlation with GDP in the last few years. Estimated GDP growth is around 8.7% and IIP estimate has been revised down to 5.1% as against a 7 year GDP growth average of 6.47% and IIP growth average of 6.7% [This slowdown can be widely attributed to the slowdown in manufacturing sector, with almost everything hit bad with the fluctuating fortunes of the global economics]
  • Consumer Price Index [CPI] has shown a growth of 5.23% YoY from last year to the end of this financial year[ Apr 07-March 08]

Sector Report

  • Manufacturing Sector : This sector has taken quite a beating with the rise of the global economic turmoil which in turn has deeply affected the index growth. Those who were domestic market focussed, with credit and interest oriented business model like automobiles or consumer durables were hit because of the decrease in liquidity. Those industries which were export focussed were screwed (whoops!) because of the sharp appreciation of INR. The bottomline it grew by only 3.95% in Jan 2008[188.88] as compared to 6.09% in Jan 2007. [Show your kids the meaning of going down πŸ˜€ ] It has contributed overall circa 26% to the national GDP [thank god!].
  • Services Sector: This sector has overall taken a huge dent in its profitability, but continues to make a strong contribution to the economy. It continues to make contribution of over 52% but less than 55% to the Indian economy.
  • Agricultural Sector: This sector continues to under perform despite repetitive waivers from our FM. Hence to save him the embarrassment, Google made it sure I cannot lay my hands on the latest report. Yet, in the first two quarters of the year, it registered a minuscule growth of 3.8% and 3.6%.

Analysis

Since last year 2007, a huge implosion of sorts has happened in the housing industry in US, which has punctured a huge hole in the pockets of the financial institutions in US(read Wall Street). As a result of which, liquidity has reduced. As a cascading effect of the realty burst, people are no longer able to take personal loans with mortgage as collateral and hence the CPI in US has taken quite some shocks. Surprisingly financial institutions in EU have taken some surprisingly large exposures in US sub prime market, due to which huge losses have come home calling. Except UK where direct and non direct investment scenario looks bleak, (thankfully) EU is not undergoing any such shock therapy. So the view by now is a recession in US is going to happen, and a stagflation of sorts will be happening in India( for the information of your smart ass son, who is pestering you with these meanings while your are reading this, explain to him that inflation means: if he fails two consecutive years in his class and stagflation means if he gets lesser marks now than what he used to get. He will get the idea, sooner!)
In US unemployment levels decreased in Sep 2007, but this relief was just temporary as in Dec 2007 it shot through the roofs. This was primarily due to the huge amount of layoffs and cutbacks the financial institutions, manufacturing sector and others had been involving in.

Inflation is now stoking the coals of the hell and is literally showering them from above on the poor unsuspecting people. The main takeaway from today’s economic fiasco is that the world can take the punch of $90/barrel in its face and still grin. With the present crude levels as I write this hovering around $110/barrel, the economy of the country has taken a huge hit. This is mainly due to the dwindling cash reserves gone in importing and meeting its energy requirements. At the same time, the manufacturing sector is seeing a slashing of its profits because of higher raw material costs.

In farm production, the outlook looks bleak. Take sugar for example. Lower production for the current season coupled with still lower production in 2008-09 will shoot up the costs of sugar. The second biggest producer of the sweetener has to swallow some bitter pills in the times ahead. With the production also looking hit, and fuel prices hovering at an excruciatingly high price, the profitability of the sector looks remote. Albeit, the mills have started and even increased their demand for ethanol, but oil fired furnaces are
more in numbers. [Translation: Less of that sweetener for the international market in the coming days]

In cement sector, the consumption has increased when compared this year Jan 2008 data to last year Jan 2007 data by 7.57%. This industry in the light of increasing demand is looking to add 80million tonne of capacity over the next couple of years. So an effective increase of 40% will create some serious price wars in the system.

So finally how does it pan out, for you and me and the average Indian out there. Well, there are a few markers to carry home. Yes! India is in a slowdown mode.Things are hit. But we must not forget the internal growth machine is still intact. Of course slowdown is bad,but thats natural. Unnatural sources like

communism and dictatorship can keep the ever burning pace on(which I believe is unhealthy for the national socio-economic morale). Some hard time is although on the cards but India is expected to wade through it with relative ease, given the potential it has. So my advise? Don’t do anything. Sometimes inaction is better that action in investment world. So stay invested, stay put and don’t do anything. Cash out three years later, and laugh all your way to bank. So like that Amaron bunny, go long, really long! πŸ˜€

Sources:

  • Indian Economic Review 2007-08, Capital Market, March Edition
  • Review of the Economy 2007-08, Economic Advisory Council to the Prime Minister Report
  • The Economic Times, Friday 5th April 2008

The charts and figures are taken from the above sources, the data being in public domain released by the Indian government, and the conclusions are all mine with analysis inputs from the above mentioned sources.

Advertisements

Comments are closed.

%d bloggers like this: