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Indian economy: Poised to grow

May 27, 2003

India continues to be a predominantly agriculture driven economy. Although the over dependence on agriculture has declined over a period of time, the rise and fall in the agricultural output continues to have an impact on the growth of the economy. In this article we take a look at the sectoral breakup of GDP and its movement over the last few years. We also take a look at the performance of the Index of Industrial production (IIP) vis-à-vis the agricultural sector in FY03. The Indian economy in the 1950s was predominantly agriculture oriented, where over 60% of the GDP was constituted by agriculture and allied activities. But with the passage of time the composition of the GDP has changed tremendously. In 2002-03, agriculture contributed only 25% to the GDP. Due to the robust growth (average growth of 8% in the last 6 years) in the services sector witnessed in the last decade, its contribution to the total GDP stands close to 56%. The contribution of the services sector has gained so much importance that nearly 88% (increamental) of the GDP growth seen in FY03 was contributed by the services sector.

The manufacturing sector on the other hand has also seen its contribution to GDP increase over the years. It contributed close to 22% of the GDP in FY03. However this number has remained unchanged in the last few years. Hence one can safely state that services have become a major growth driver for GDP in the last few years. Despite this observation, the fact remains that a majority of the Indian population continues to live in rural areas. Of the total 403 m working populous in the year 2001, around 311 m workers were from the rural areas. In percentage terms over 77% of the population is still working in rural areas. So either this population is absorbed in agricultural activities (60%) or is involved in other allied sectors. If one sees the graph above, whenever there is a shortfall in rains, the first effected activity is the agricultural output. For example in FY98, there was a shortfall in monsoons as a result of which there was a drop in agricultural output growth. This effect is also noticeable in FY00 and FY01. But surprisingly the industrial sector continues to grow even in an average or good monsoon year.

Although there is a direct correlation between the agricultural and the industrial sector, one cannot identify a definitive trend. However, if we look at FY03, despite poor monsoons, which brought about a fall in agricultural output (3.9%), IIP growth has been rather healthy at close to 6%. Various factors can be attributed to this divergence. In FY03, growth in the industrial sector was fueled by revival in domestic demand combined with an upturn in exports (18%). Apart from this, thrust on infrastructure activity like the NHDP projects further boosted demand for the manufacturing sector. Spending on infrastructure projects has led to increased demand for commodities like cement and steel, positively impacting the manufacturing sector. However, a delay in monsoon could affect the industrial growth going forward.

So, even though India continues to be a predominant agriculture driven economy, the focus is slowly but surely changing towards the services sector. The manufacturing sector too is coming of its own by emphasizing on export markets. In the last 2-3 years Indian companies have become more efficient and competitive compared to their global counterparts. This has helped them to successfully compete in the global services and manufacturing arena. The proof of this lies in the growth seen in the country’s exports despite a poor global economic environment. Also with the changing dynamics of the Indian economy, the composition of the GDP is set to witness further changes.

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