Positive signals and blips

ECONOMY REVIEW

 The first two quarters of a fiscal year are highly critical for a farm-dependent economy like India as the monsoon season (June to September) falls in this period.

 Below-normal rainfall last year saw agriculture shrink by 3.2 per cent, and the overall GDP grew by just 4.3 per cent.

 But in 2003-04, the country received bountiful rains during the monsoon, which were well distributed. This has led to very optimistic growth projections for the current fiscal. Analysts expect the economy to grow at a rate of around 6.5 per cent in FY04.

 First-half review

 During the first half, the country witnessed normal monsoon rainfall; industrial sector maintained pace (although industrial growth declined in July, which could be attributed to the base effect); inflation remained subdued and corporate results and performance of the equity markets were encouraging.

 However, there are some negative signs, too, like performance of infrastructure sectors and declining exports.

 Industry: The first four months of the current fiscal saw industry grow 5.6 per cent, higher than the 5 per cent growth rate during the same period last year.

 This somewhat improved performance was only because of the buoyancy in the manufacturing sector. Growth in mining and electricity sectors, on the other hand, worsened compared to the same period last year.

 The manufacturing sector improved its performance mainly on account of the buoyancy in cyclicals.

 Basic metals, non-metallic mineral products, transport equipment and rubber, plastic, petroleum and coal products are the sectors witnessing higher growth rates.

 The growth in transport equipment and basic metals could be attributed to the boom in construction of houses and roads.

 Machinery and equipment, after staging a not-so-impressive performance in the first few months of the current fiscal, have started showing a pick-up in July.

 This indicates that investment in new capacities should be under way in many sectors.

 There are two negative features about the ongoing manufacturing recovery.

 First, it has not reached all the sectors. During the period from April to July FY04, seven segments with a total weight of 51 per cent in manufactured products have contributed around 100 per cent to manufacturing growth.

 Second, a pattern of switches emerges when we look at slightly longer-term data (previous three quarters). Cotton textiles, textile products, basic chemicals and metal products have seen their contributions swing sharply in the negative direction.

 On the other hand, wood products, basic metals and other manufacturing industries have seen sharp positive swings. Different industries seem to be taking turns to accelerate during the course of the ongoing industrial recovery.

 The net result is that overall growth is stable, but many individual industries increasingly appear to be going through a rather uncertain phase.

 Under the use-based classification, buoyancy in capital goods continued - its performance during the first four months improved compared to the corresponding period in the previous year.

 In the first quarter, machinery and equipment did not make any contribution to growth in the capital goods segment but in July machinery and equipment other than transport equipment turned sharply positive, indicating a pick-up in investment activity.

 Consumer goods, however, witnessed maximum growth in the use-based categories during April-July.

 During the period from May 2002 to March 2003, consumer durables witnessed a negative growth rate. They moved into a positive territory in April FY04 and this is persisting. The favourable price scenario and cheap finance appear to have helped the consumer-durables segment.

 On the other hand, infrastructure sectors have performed badly so far in FY04. This is partly because of very high growth during last year.

 Key infrastructure sectors with a weight of 26.68 per cent in the overall index of industrial production (IIP) grew 3.6 per cent in April-July FY04 compared to 7.2 per cent in April-July FY03.

 Trade

 After registering a double-digit growth in April-May, exports declined to a low of 5.75 per cent in July FY04.

 On the other hand, the import growth rate remained somewhat high at 17 per cent (albeit lower than June) driven largely by non-oil import growth of 22 per cent.

 Oil imports grew by a mild 3.7 per cent and declined substantially in absolute amount compared to the previous month by around $800 million, reflecting softer oil prices.

 For April-July FY04, overall export growth rate fell to 9.2 per cent. The substantial decline in exports was partly a consequence of the high base prevalent last year.

 It was also due to the lagged effect of currency appreciation of the last few months. The rupee appreciated by more than 4 per cent since January FY03.

 Inflation: The inflation rate based on the wholesale price index (WPI) has been continuously falling since the start of the year. From 6.6 per cent during April 2003, it has declined to 3.8 per cent in August 2003.

 The declining inflation rate in the recent months is more due to higher base than falling price indices. The base impact is playing a dominant role in all the three subcategories - primary articles, fuel and manufactured products.

 Prospects for the second half

 Agricultural performance is highly dependent on how the monsoon performs.

 After a normal monsoon season, good crop production is anticipated, which will lead to a reversal in agricultural performance after a 3.2 per cent decline in agricultural GDP during the last fiscal. We expect around 7 per cent agricultural growth during FY04.

 A good agricultural performance this year will have a positive impact on industry. Agricultural growth will provide a boost to rural economy, generate rural income and, hence, create demand for industrial goods.

 Also, the manufacturing sector