Why is growth still falling? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 3 March 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
This week, there was more bad news on the economic growth front. From Oct-Dec 2011, the Indian economy grew at an annualized rate of 6.1%, a fall from 6.9% in the previous quarter. In fact, in the last seven quarters, the growth rate has been falling. In early 2010, the growth rate was 9.4%, and it has been a steady decline since then.

The natural question to ask is why is the growth rate still falling. While other economies around the world (except in Europe) appear to be recovering, the Indian economy is stumbling. It does not appear to be caused by global factors, and the fall in growth is likely due to internal problems, rather than anything else.

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If we take a closer look at the growth numbers, there are some surprises. First, most of the service sector components of the economy grew very well. Finance, insurance, real estate, and business services all grew at a rate of 9%, which is very good. This is encouraging because the Indian economy has a large service sector.

Where the numbers were not so good was manufacturing. Manufacturing grew at a paltry 0.4% during the quarter, i.e. practically no change. The manufacturing sector has been struggling with low growth for some time, and now it is dangerously close to no growth, and potentially even a contraction.

So why is the manufacturing sector stumbling while the service sector is growing nicely? If it were a global problem, then we'd expect both sectors to suffer slowing growth. However, the internal economic and political structures in India make it more difficult for the manufacturing sector to grow.

The manufacturing sector suffers most due to government problems. Due to excessive bureaucracy, corruption, competing political interests, it takes a long time to get anything done. For example, the Bandra-Worli Sea Link in Mumbai took over 10 years to build, when it should have taken less than half the time.

This type of experience is symptomatic of the manufacturing sector. Things cost a lot more than they should, and production takes much longer than it should. In contrast, service sector industries are smaller scale, more flexible, and face less government bureaucracy. As a result, they can grow faster.

One of the reasons China has been able to sustain such high growth rates is that they are very efficient at manufacturing goods. For India to achieve double-digit growth rates, the manufacturing sector will need grow faster. The only obstacle in the way of this occurring is corruption and bureaucracy.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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7 Responses to "Why is growth still falling?"

Suresh Kumar

Mar 5, 2012

Capital Goods sector has been directly affected due to high interest rate, while consumer goods (both durable and non-durable) have not been affected so much. What with ban on mining in some areas, slow environmental clearances, and clearances for projects, coal and gas shortages, and competition from cheap chinese goods it is hardly surprising that manufacturing growth has stalled. Whatever, Anna Hazare component might be, it would be good in the long run.

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Dr.Jawahar Lal Sen

Mar 5, 2012

It is an over simplified statement.Uneven distribution of National Income and mass poverty as well as black mail by coalition partners are also equally responsible.

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Vijay Rastogi

Mar 4, 2012

Well to the best of my understanding Industrial growth depends on consumption of goods produced.There has been low growth in consumption due to over production.You cannot expect that consumption will increase at 9% per quarter for industrial goods.Income level of major population has not increased to sustain this level consumption.

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Om Prakash Sharma

Mar 4, 2012

100% correct

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Vineet Kumar Gupta

Mar 4, 2012

Dear Asad

I don't agree with your views that growth is falling due to corruption? Corruption was there in 2010 or before and even now. There is no change in quantam (difficult to prove either way).
When things are going well, we keep corruption on back burner inspite of the fact that it is still there but when things are not going well, we look for scapegoat in corruption.
This faltering clearly shows that we are part of world economy and any major dent elsewhere will have impact on us as well. Ofcousre, how big and how long is a question, which no one has answer.
We expect more incisive analysis rather than sterotype.

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Sreedhar.M.K

Mar 4, 2012

The analysis on lower growth rate is relevant and important in the face of forecast by the top cops of Economy, like the Planning commission Chairman Mr Ahluwalia, the PM Economic Advisor Dr Ranga Rajan, the FM, Mr Mukharjee, the PM etc, from time to time to say that it would be 8-5%, 8%, 7,5% etc. All the "predictions" have been belied and the growth has come down to 6.1%, the Manufacturing Sector congtributing the maximum for the steep fall!.. Why is that we have failed to grow under the Manfg. sector? One reason assigned is the delay attributed to the Govt. machinery in getting clearance to get the projects move. Ofcourse this could have contributed in pulling down GDP to a considerable extent. Another reason is corruption is another reason attributed. This is also true. But the real reason appears to be some where else. Indian Industries have been braving these hurdles for decades and it is nothing new. The example of delay in executing Bandra Worli under sea link is cited as an example. ofcourse such delays, are inherent in the Indian political and Government system with which we have lived. Such delays cause cost escalation, which would be exploited by the Approving Authorities and the contractors. Having said all these things, it is not that some one who is in the business would not stope doing his business on account of these factors, if this were to be true, corruption could have been reduced a lot, if not eliminated. One of the main promoters of "corruption" is the Industry and wont blame it,even if they blame wont hesitate to resort to it, it profits them. 2G scam, CWG Scam etc are monumental examples. One cannot blame the Govt. machinery and the political bosses for corruption and slow growth rate in the Manfg sector. Ofcourse, if the government sets up special industrial estates, provides, essential infrstructures, liek, Power, water, communication etc industries could have grown faster. A lot of thing have been done by setting up special exonomic Zones, Industrial parks etc. but all this has been done with out proper infrastructure like power etc and "real estate profiteering seem to drive them, rather than setting up basic manfg. Industries. Another reason appera to be lots of imported good being dumped into country, especially from China, whould have caused considerable damage. Textile Industry, which was once our main mafg. activity, has not been in the reckoning, we import many items which could be locally manufactured, which would have been responsible for the slow growth or shrinkage in the mafg. secotr. Further lack of thrust in the export sector, of engineering and manufactured goods, would be another reason. The recession or global economic melt down in the West,would have cut down our exports, especially of auto components would have been a drag on this sector. A specialist expert team needs to study the problem and find ways for the manfg. sector to grow much faster, should be undertaken expeditiously, by the Federation of Indian Industry and the Govt. agencies jointly. We must go back to baiscs of economy of relying on Manfg sector and agricultural sectors to increase GDP and see a double digit growth of the economy. Blaming Govt. would not help.

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Subba Bangera

Mar 4, 2012

It is the manufacturing sector which to retain monopoly used the tactic of appeasing the administration and politicians to have barriers for others to enter business other than few selected ones. Today the bureaucracy is like turmits eating away all the good thing about India and the talents. Only way for manufacturing sector to succeed is to stay united.

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