MONSOONS AND MANUFACTURING SHAPE INDIAN DEMAND.

In Indias agriculture-dependent economy, monsoon rains have a direct impact on the level of demand for consumer goods and services. Years in which the monsoon rains fail are lean years for rural families that make up more than 70 percent of Indias total households.

The southwest monsoons, which provide over 80 percent of Indias annual precipitation, brought more than average rainfall to most areas of Southern India during 2003. That has set the stage for increased sales of household goods as well as agricultural supplies and equipment in 2004. As a result, year-on-year growth in overall economic activity will approach 9 percent in the second quarter of this year.

Indias agricultural sector is gradually becoming more mechanized, and that will drive up demand for farm utensils and equipment this year. Look for sales of hand tools for farming to rise in excess of 15 percent year-on-year through the remainder of 2004. Over the same period, farm equipment sales should grow in excess of 10 percent.

The strength of Indias agricultural economy in any given year will strongly shape internal demand for goods and services through the remainder of this decade, but the manufacturing and service sectors will play increasingly prominent roles. The trend in Europe and the United States toward outsourcing business services in India will drive double-digit service sector sales growth throughout 2004.

Service sector growth will contribute to strong demand for equipment associated with information technology and telecommunications as 2004 progresses. Sales of personal computers and servers should grow in excess of 10 percent, with strongest gains noted in the southern metropolitan areas of Bangalore, Hyderabad, and Madras.

Sales in the telecommunications sector will get a double boost this year and next. Growth in both the manufacturing and services sectors will boost sales of business telecommunications systems by nearly 15 percent year-on-year by mid-2004, and double-digit growth should predominate into 2005. At the household level, demand for cellular phones and associated services will experience sales growth that will peak at over 20 percent this year.

Indias shortage of foreign direct investment continues to limit orders for capital goods. Sales growth of 5 to 10 percent will primarily be driven by internal investment resulting from expansion of local industry. Demand for capital goods is not likely to live up to potential until India makes major cuts to politically sensitive government subsidies and swollen public payrolls that have resulted in unsustainable deficits.

Several economic factors weigh in favor of sales growth for both capital goods and high-end household durables. Punishing interest rates have become more consumer friendly over the past year and the downward trend is likely to continue.

Consumer financing is scarce in rural areas, but that deficiency is not likely to last long. Banks and retailers are offering increasingly attractive financing terms that will put a wider array of household durables within reach of the average Indian family. As a result, sales of gas stoves and refrigerators should grow by nearly 10 percent during the first half of this year and peak at over 10 percent during the second half.

Growth in furniture sales will primarily be driven by rising demand for local products, but imports should gain market share in Indias leading urban markets.