GROWTH SLOWS

Dalal Street was in celebration mode. The lower than expected inflation figure, which at 12.40% is lower than last week’s 12.63%, announced yesterday late evening, set the moods. Then there was also news of crude prices falling. It was at $116.88 per barrel after dropping $2.56 dollars. This called for double celebration! And since morning, the markets have been up over 300 points and sentiments continue to remain perked up.



And in all this jubilation, what added more fizz was the better-then-expected GDP figures for the first quarter ended 30th June 2008 for the current fiscal. Though the GDP, for the first time in 9 quarters fell below the 8% mark, the markets celebrated this too! Mind you, this is actually a slowdown and in other circumstances, if the market had yet to “discount” these figures, then the fall which would have actually happened would have been a crash.



India's Gross Domestic Product (GDP) growth for the April-June 2008 period had slowed down to 7.9% as against 9.2% over the corresponding quarter of the previous year and is lower than the sequential growth of 8.8% in Q4FY08. Clearly higher inflation and higher interest rates are now leaving a telling effect.



Construction growth slowed to 11.4% from 12.6% in the previous three months but on a YoY, it has grown from 7.7%. The key indicators of construction sector, namely, cement and finished steel registered growth rates of 5.8 per cent and 4.5 per cent, respectively, during Q1 of 2008-09, as against the growth rates of 7.2 per cent and 5.4 per cent, respectively, in Q1 of 2007-08.

While the manufacturing sector growth was at 5.6% compared to 5.8% in the first quarter, the fall on a YoY was much sharper where the growth was 10.9%. This growth rate has been affected mainly on account of companies putting off further expansions and growth due to mounting costs and higher interest rates.

Growth in electricity, gas & water supply YoY fell from 7.9% to 2.6%; trade, hotels, transport & communication fell from 13.1% to 11.2%. Financing, insurance, real estate and bus services fell from 12.6% to 9.3%. The sector which showed a growth, apart from construction, was mining which grew from 1.7% to 4.8%.



What is indeed a matter of concern is the continuous fall in agriculture, forestry & fishing, which YoY slipped from 4.4% to 3%. The production of crops rice, wheat, coarse cereals and pulses during the Rabi season (which ended in June, 2008) of 2007-08 recorded growth rates of 3.3 per cent, 3.4 per cent, 8.6 per cent, and (-) 7.9 per cent, respectively over the production in the corresponding season of previous agriculture year. Among the commercial crops, the production of oilseeds declined by 12.6 per cent during the rabi season of 2007-08, while the production of cotton and sugarcane recorded growth rates of 14.0 per cent and (-) 4.2 per cent, respectively during the agriculture year 2007-08.



This does not bode too well for India as the fall in farm products would have a direct repercussion on the price of commodities which could again lead to a flare up in inflation. According to the met department, the June-September monsoon, which accounts for four-fifths of the nation's annual rainfall, was 39% below average in the week ended Aug. 27. Plus the floods in Bihar, this has also affected agricultural production. Unless efforts are made to step up agricultural growth, inflation cannot be reigned in only through external factors like hiking interest rates and curbing spending.



The market has, for now, or for today, discounted all these news and is looking ahead with more resurgence. But it’s all a question of sentiments. In the coming days, inflation rate and crude price would continue to dominate. For now, markets are up, so things are good. Live for the moment is probably what the market is teaching us!