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Growth still tied to Monsoons?

Equitymaster 
on 18 July 2009

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"Nowadays, poor monsoon has a much lower effect on the economy than, say, what it was 15-20 years ago,…a very bad drought or a very poor agricultural output... would affect the GDP and demand and would have some effect on FMCG take off." These are the words of Mr. Adi Godrej, the Chairman of Godrej Industries.

However, the Centre for Monitoring Indian Economy (CMIE) believes otherwise. The agency has now downgraded India's growth forecast to 5.8% in the current fiscal from its earlier estimate of 6.6%. The reason behind the same is lower agricultural output, in addition to the slower industrial recovery due to the poor progress of monsoon. As per a statement made by CMIE, "The poor progress of the south-west monsoon till the first week of July 2009 is expected to adversely affect the prospects of growth in agriculture, in industry and in the gross domestic product of the country as a whole." It may be noted that in the Union Budget, the government also stated that the country will be in a position to grow at a rate of about 7% only if the monsoons remain normal.

We might not find out who is correct this year though, given that the rainfall in the last two weeks has led to India monsoon deficit to reduce considerably. During the week ended 15 July, India’s monsoon deficit reduced to 27% from 54%. Above normal rainfall in central India, west coastal regions and Orissa has led to this reduction in monsoon deficit figures. We hope that the monsoon continues to progress well and this debate remains unresolved this year.

Wall Street signals a bounce back, ignore it

Recently, two of the most important US banks - JPMorgan Chase and Goldman Sachs – announced better than expected quarterly results. The US Treasury Secretary Timothy Geithner has wasted no time in terming this as 'important signs of recovery'.

In our opinion, this assessment is premature, as several iconic non-financial companies in the US are still battling for survival. We would be cautious in relying too much on Wall Street's signals anyway, given it tendency to go overboard. For example, the New York Times reports that Goldman has set aside US$ 11.4 bn thus far this year for employee bonuses. It is now well known that bonus-induced risk taking was at the heart of the financial meltdown. So it is hard to explain why Wall Street would want to walk straight into the trap all over again.

Wall Street is the last place we would want to get our economic signals from. It would be much better if Mr. Geithner too picked his cues from a more sober place.

Sensex 21,000. By July 2010.

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