After successive sessions of correction, the markets got some air to breathe as stocks witnessed buying in the last two sessions. Wednesday's buying can be seen in light with the Central Statistical Organization's third quarter GDP growth numbers.

In this article, let's find out the reasons for this higher GDP growth and analyse which sectors are likely to benefit the most.

India, world's 11th largest and Asia's 3rd largest economy, grew at a scorching double-digit rate during the third quarter of 2004. Aided by good monsoons which led to a turnaround in the agriculture sector, the country's GDP growth climbed 10.4 per cent on a YoY basis as against 8.4 per cent registered during the second quarter and 5.7 per cent during the first quarter of the current fiscal.

The break-up of GDP growth shows that higher growth is largely due to 7.4 per cent growth in manufacturing and 16.9% growth in agriculture.

The fact that larger growth has come from agriculture will result in higher income in the hands of the populace. More so for the rural sector, as 70 per cent of the population is dependent on agriculture for their livelihood.

Higher agriculture production will ensure higher purchasing power in rural India, which in turn will be beneficial for the consumer driven industries like FMCG and consumer durables.

The graph below shows the correlation of agriculture growth vis-à-vis growth in FMCG major HLL's topline, which will substantiate the argument. However, one must remember that there is a lag effect between output and actual spending. HLL, in its analyst meet, indicated that typically a farmer retires his loans before spending on consumer goods.

Due to the government's thrust on infrastructure development, the construction sector grew by 5.1 per cent YoY. Higher growth in construction is a positive for cement and steel industry. While we expect cement demand to grow at a steady rate, prices are not likely to improve substantially, as the demand-supply parity is yet to turn favorable for producers.

Power industry in the country also grew by 5.2 per cent for 3QFY04, which could largely attributed to the robustness in the industrial production. While incentives from the Electricity Act 2003 has helped, we expect the benefit to accrue over the next three to five years.

Higher capital spending in generation capacity will help engineering companies to grow at a faster rate. Improvement in T&D segment (transmission and distribution) will also provide a fillip to the engineering as well as the aluminium industry. Currently, power transmission lines consume 40 per cent of the aluminium produced.

Cotton production, which is expected to rise by 42.1% this fiscal, will definitely provide a ray of hope to textile companies. Cotton is the most important raw material and constitutes around 50 per cent of the cost of production. Most of the textile companies suffered at the operating level in the last three-quarters due to higher cotton prices. However, one must remember that cotton prices move in line with international prices.

So, one has to wait and watch the cotton production in countries like China and the United States.

So everything sounds good! It seems that India is shining! But investors will to have to bear in mind that the growth prospects of the Indian economy has always been positive. And it takes time for these opportunities to translate into higher growth in revenues for India Inc.

Every business has a value. It is important to ascertain how of the current value of a stock actually reflects the likely benefits in the future. We believe that select stocks from like auto, power, engineering and few commodity sectors are expensive compared to the medium-term growth in profitability.

Besides, there can be some uncertainty in the markets due to the forth-coming elections. Appreciation of the rupee vis-à-vis US dollar will have an adverse impact on export-oriented industry like textile and software. In this year, India's economy has grown at a faster clip due to partly structural reasons (like productivity improvement and benefits from government spending) and partly one off in nature (higher agricultural output).

Whether this rate of growth is likely to continue in the medium-term remains to be seen.

What everyone in the stock market already knows is already factored into the stock price and valuations. Stock markets and equities are all about predicting 'unknowns' and in the process, safeguarding ones own principal. Therefore, always look at the downside before the upside.

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