According to the Reserve Bank of India, the decline in bank credit is mainly due to the fact that industries are preferring internal resources (which are rising due to increased profits) and external commercial borrowings to meet their financing requirements.

A quick look at that data for euro issues shows that there were only five issues during the April to November 2003, which mobilised Rs 1,100 crore (Rs 11 billion). Among the other sources of financing, the same period witnessed a decline in mobilisations from the primary market. The private placement market however posted robust growth in mobilisations (here too the public sector accounted for all the growth even as the private sector saw a drop in mobilisations).

Given that corporate India is more profitable today. But it is unlikely that large scale investment activity can be undertaken without resorting to loans (incl. for working capital requirements). It would therefore be wise to exercise caution of any suggestion that there is large scale investment activity that is under progress.

2. Freight movement via the railways
Over the last three years the growth in railway freight traffic has been between 3.7 per cent and 5.3 per cent. This year the CMIE projects the growth to be in excess of 6 per cent, and this is clearly indicated from the graph below.

Although monthly data of cargo handled at ports is not available with us, the annual growth numbers clearly indicate a jump in activity. Annual growth, which was put at 3.4 per cent in FY01, jumped to 9.0 per cent in FY03.

Growth in freight traffic gives credence to the view that there is an increase in economic activity i.e. more raw materials and finished goods are being transported.

3. Growth in non-oil imports & in domestic capital goods sector
Non oil imports are another good indicator of the level of economic activity. After posting negative growth in FY01 (-7.5 per cent), there has been a steady pick up.

Non Oil Imports: Rising growth
Growth % (YoY)
FY01	-7.5%
FY02	9.0%
FY03	16.6%
FY04E	26.0%

The domestic capital goods sector too has posted robust growth so far in FY04. But first let's take a brief look at the annual growth performance over the last couple of years.

Capital Goods Sector: Turning around
Growth % (YoY)
FY00	7.0%
FY01	1.7%
FY02	-3.4%
FY03	10.5%

The monthly numbers for the current year too look encouraging.

A more vibrant capital goods sector indicates that there is a pick up in investment activity in India. Although the 'non food credit' numbers do not support this view, but recent months have seen a sharp rise in the output of the capital goods sector.

One can thus assume that corporate India has been funding initial capital expenditure from its internal resources.

4. Foreign Direct Investment
FDI is an indicator of how foreign economies perceive India to be as an investment destination. FDI represents investment by foreign entities in Indian business (leading to creation of real assets, employment opportunities etc.) as against FII which basically represents investment in equity and debt securities. Also, FII money is 'hot' i.e. it can leave the country as fast as it comes in, unlike FDI which is much more stable.

The FDI inflows over five years are depicted below -

Between April and December 2003, the FDI inflows (net of acquisitions) have amounted to just $799 mn. On the other hand FII inflows during April to October 2003 amounted to a staggering $4,800 mn!

FDI brings with it several benefits. The most obvious of these is 'money' which helps build productive capacity. Importantly, FDI, usually, brings with it access to the latest technologies and also an opportunity to export to global markets (sometimes). These benefit in terms of a more productive and efficient economy, and a growth in foreign trade.

The low level of FDI inflows remain an area of concern.

5. Fiscal deficit
The finance minister in the recent interim budget announced, to everyone's satisfaction, that in FY04 it was expected that the fiscal deficit as a percentage of the GDP will actually decline to 4.8 per cent. If this were to turn out the way it has been projected, it would be for the first time in several years that there would be a education.

However, the overall fiscal health (central and state combined) of the economy is another story altogether. In the last three years, the combined fiscal deficit has been between 10 per cent to 11 per cent. Although this year it is projected to decline, past trends indicate the final number could be higher than the projected 8.8 per cent of GDP.

Such a large combined deficit has the potential of derailing any sustained economic recovery. This is largely due to the fact that deficits need to be financed from money borrowed from the markets i.e. the government will need to compete with other borrowers. This could (in recent years this has not happened, but it could as demand from the corporate sector picks up) result in higher interest rates.

There are definite indications that the Indian economy is speeding up i.e. it is shining. Investors who bet prior to April 2003 that this would be so are today probably counting their spoils. However, from here onwards where the economy will depend critically on the success/failure of the monsoon in 2005. A long term sustained boom will again be subject to India's ability to reduce its fiscal deficit to manageable levels and ability to attract FDI. Of course, the monsoons will continue to play a major role.

What should you do?
Do not get carried away in the frenzy. Also avoid investing on the basis of reports that project India to be a superpower in 2040. By then the markets would have gone through probably 10 bull/bear markets!

Most importantly, stick to your asset allocation. Do not increase allocation to stocks just because as an asset class they have done well. There is no surety that returns will be as exciting going forward.

Finally, a growth in business activity does not mean an increase in profits, which ultimately drive stock prices. So be careful before you latch onto the next economy linked growth story.