India’s growth story continues…
After showing a robust growth (of 8.8%) in GDP (Gross Domestic Product) for Q1 of FY 2010-11, the Indian economy continued to be on the growth path by now expanding marginally to 8.9% in Q2 (July 2010 to September 2010) of FY 2010-11.
The GDP for Q2 of FY 2010-11 (at the constant prices of 2004-05) is estimated at `11,46,637 crore, as against ` 10,53,057 crore in Q2 of 2009-10.
The upward movement in Q2 GDP, is attributed to the increase in output of industrial sectors (which accounts for 20% of the overall GDP) and lower inflation numbers posted under the new series.
During the Q2 of FY 2010-11, the manufacturing activity grew at 9.8% (8.4% in Q2 of FY 2009-10), while mining & quarrying and construction activity grew at lower pace of 8.0% (10.1% in Q2 of FY 2009-10) and 8.8% (8.3% in Q2 of FY 2009-10) respectively.
Even trade, hotels, and communication services rose by a handsome 12.1% (8.2%. in Q2 of FY 2009-10). But financial, insurance and real estate services restrained the growth by expanding only 8.3% (11.3%. in Q2 of FY 2009-10).
Agriculture, forestry and fishing reported its fastest growth in 11 quarters expanding by 4.4% in Q2 of FY 2010-11, as compared to 0.9% growth in the same period a year ago.
Reacting to the economic growth rate Finance Minister, Mr. Pranab Mukherjee said, “We may be confident that at the end of this year, the GDP growth will not be less than 8.70% - 8.75%... It may be more.”
In our opinion, despite the lackluster IIP numbers reported in the last two consecutive months (6.9% in August 2010 and 4.4% in September 2010), the Q2 GDP numbers distinctly indicates that the Indian economy is on a growth path, which would stream inflow of capital into our country.
Also, that the industrial & service sector is contributing in a major way to the country’s economic growth, reveals the fact that we are now an “industrial and service oriented” economy and not only an “agrarian” dependent economy. Hence given that, we may consequentially see growth in such sectors participating in the economic development. But to take the advantage of such robust economic situation, in our opinion it would be ideal to go in for diversified equity funds rather than thematic funds, because they (diversified equity funds) can provide your portfolio with the required margin of safety, as the fund manager has the privilege in such funds to take appropriate sector and stock bets therein, as per the opportunities prevailing from time to time.
The other impact of the economic growth is as under:
· Creation of jobs:
As the economic growth takes place, the demand for goods will rise on account of consumer spending; however if high prices persist, then consumption will be compressed. For individuals it also leads to creation of jobs and increase in disposable income.
· Rise in policy rates:
The central bank may take a clue from the economic growth rate data and may increase policy rates (repo and reverse repo rates) by 25 basis points, making them more relevant to the current growth rate and also make an attempt to contain inflation which is currently at uncomfortable level of 8.62%, due to demand side factors. But, this is subject to the inflation trends which have to be carefully watched as it will determine the course of action the RBI will take in the second quarter review of monetary policy (scheduled on December 16, 2010).
Another noteworthy factor will be liquidity situation. At present liquidity situation is quite tight, as more money have flown into newly issued NCDs, Bonds and Long-term Infrastructure Bonds. Also the money invested in the primary market issues (IPOs, FPOs,) hasn’t come back completely in the secondary market. Also, now in the month of December 2010, the tight liquidity situation will continue as advance tax obligations are scheduled in this month.
About The Author:
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