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Economy: Strong political will is the key... - Views on News from Equitymaster
 
 
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  • Jan 6, 2004

    Economy: Strong political will is the key...

    When various economists had predicted a strong GDP growth for India, the expectations had to be taken with a pinch of salt. However the second quarter performance of the Indian economy, in terms of GDP growth, seems to have vindicated the stand of most economists around the country. The second quarter GDP growth stood at 8.4% compared to 5.7% in the first quarter. What do these numbers point to and is this growth rate sustainable?

    If one were to look at the table below, the sectors that are the major constituents of the GDP are the ones growing the fastest, unlike a well spread-out growth in all the sectors of the economy. For instance, the services sector, which constitutes almost 52% of the GDP, grew by a significant 9.9% in the September (7.6% in the June quarter). Growth in all the constituents of the services sector was mainly responsible for the overall growth for the sector. The various constituents are mentioned below.

        YoY Growth (%)  
    Sector 1HFY04 1QFY04 2QFY04
    Agriculture 4.1 1.7 7.4
    Mining and Quarrying 2.7 3.1 2.3
    Manufacturing 6.8 6.4 7.3
    Electricity gas and water supply 3.8 4.8 2.9
    Construction 6.1 5.7 6.4
    Industry 6.1 5.8 6.3
    Trade, Hotels, and Communications 10.7 9.6 11.9
    Financing, Real estate and business 7.2 7.1 7.3
    Community, social and personal 6.7 4.3 9
    Services 8.8 7.6 9.9
    GDP at factor cost 7.0 5.7 8.4

    The industry too has not disappointed. Compared to a growth rate of 5.8% in the June quarter, industry recoded a growth of 6.3% in the September quarter indicating the sustained revival of the sector observed since the last couple of years. As far as the third largest constituent of the GDP is concerned, i.e., agriculture, it recorded a growth rate of 7.4% in the September quarter compared to 1.7% in the June quarter. This is primarily due to adequate rainfall in 2003, which has led to projections of record output for agricultural produce.

    If one were to analyse in detail, we observe that among the services sector, growth in the travel and tourism industry coupled with the telecom sector has been the main contributor to the robustness in the services sector. The travel and tourism industry, which was under a prolonged slowdown, has seen a revival in the last 2-3 quarters and higher tourist inflows (growth of nearly 15% compared to 2002) have benefited the sector immensely. The telecom sector on the other hand has been helped by the significant rise in the user base mainly due to falling tariffs (WLL services have been the main cause for that).

    Industry has been helped immensely by the strong growth seen in manufacturing as well as the construction sectors. This may be attributed to the strong growth in demand from both the domestic and export markets that the Indian companies are increasingly catering to. Construction activity in the form of road projects may be one of the main contributing factors for the strong growth.

    As far as the sustainability of the GDP growth is concerned, one needs to understand the importance of higher level of investments in the economy. This is where China has benefited immensely from high FDI inflows and has managed to maintain a strong GDP growth in the last decade or so. While the contribution of agriculture to the total GDP has declined over the years, a significant part of the population continues to rely on agricultural income, thus ensuring a higher dependence of the GDP on agriculture. This is where investments in industry will play a larger role in creating higher employment for the rural masses. Further relaxation of the FDI norms may be required down the line.

    Availability of power (cheap and continuous) is a major determinant of the sustainability of economic growth for any country. In India, the poor quality of power infrastructure continues to be one of the major hindrances to larger investments by foreign entities interested in setting manufacturing facilities in the country. While steps have been taken to reform the power sector, the speed of implementation of the reforms process is the crucial question here.

    In conclusion, the services sector, which has been the star performer for the Indian economy for over a decade now, should not be the only growth driver of the economy. India has immense potential in the manufacturing sector that is still unexplored. The only hindrance to the same is inadequate basic infrastructure like roads and electricity. Strong political will to aggressively implement the reforms process and to further open up the economy is the need of the day and that is what is required to sustain this high level of GDP growth.

     

     

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