What's behind the fall in Growth? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 December 2012
What's behind the fall in Growth? A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
On Friday, Indian economic growth came in at 5.3% for the second quarter of FY2012-13. Two quarters ago, growth made a new low at 5.3%, the lowest level since well before the crisis began in 2007. The previous quarter saw the first uptick in growth since 2009, as growth increased from 5.3% to 5.5%.

Unfortunately, this did not mark the start of any uptrend as many had hoped. Growth has promptly retreated back to 5.3%. Government forecasts of a rise in growth next year are looking less likely given today's data.

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So what is behind this fall in growth? A closer look at the data provides some interesting insights. The fastest growing sector was finance, insurance, real estate, and business services; these grew at 9.4%. Construction grew at 6.7%, also very strong.

The bad news comes from the agricultural and manufacturing sector. Agriculture grew at 1.2%, and manufacturing expended by only 0.8%. Given these figures, the overall figure of 5.3% makes sense, though it does not reflect the divergence in growth rates in different sectors.

Agricultural growth is not something to extremely concerned about. If food production is growing along with population at a low stable rate, then this is fine. Manufacturing growth is the real concern. The manufacturing sector has remained extremely stagnant over the past years.

Much of the blame for the lack of manufacturing growth is due to inefficiencies in the system. Manufacturing requires land acquisition, numerous government permits, strong infrastructure, and dealing with strict labor regulations. All of these things are weaknesses in the Indian economy, and are what constrain manufacturing growth.

In contrast, services can grow strongly because it doesn't require the same inputs as manufacturing. All you need is office space, computers, Internet, and an educated workforce. This is much easier to do as compared with a manufacturing business.

If we want to return to the growth levels seen in the past (i.e. above 8%), we need to continue to take steps to improve manufacturing in the economy. This means making it easier and more efficient to do business. The government certainly is aware of this; it is trying to put through a variety of reforms to improve the situation. Of course in politics, this is easier said than done.

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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