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Where are we headed? - Views on News from Equitymaster
 
 
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  • Jul 2, 2001

    Where are we headed?

    The Indian economy has not been performing well over the last few quarters. This should come as no surprise as there has been ample evidence for sometime that investment and consumption activity have shown no buoyancy. However, few may have anticipated the sharp decline in GDP growth in the fourth quarter of FY01.
      FY00 FY01
    (at 1993 - 94 prices) 1Q 2Q 3Q 4Q Full Year 1Q 2Q 3Q 4Q Full year
    Agriculture, forestry and fishing 4.5 1.2 (0.7) (1.3) 0.7 0.6 0.5 1.0 (1.4) 0.2
    Mining and quarrying (0.7) 3.0 0.9 3.6 1.7 5.0 3.8 4.4 1.9 3.7
    Manufacturing 5.8 6.5 7.1 7.6 6.8 7.0 6.0 6.1 3.5 5.6
    Electricity, gas and water supply 2.8 8.3 5.5 4.2 5.2 5.7 3.0 7.8 2.6 4.7
    Construction 6.4 7.8 7.5 10.3 8.1 8.4 8.4 5.2 0.7 5.5
    Trade, hotels, transport and communications 8.1 7.5 8.2 8.3 8.0 9.7 7.3 6.6 4.5 6.9
    Finance, insurance, real estate and services 10.6 10.6 10.8 8.5 10.1 9.5 9.8 8.0 9.3 9.1
    Community, social and personal services 14.0 6.2 16.9 11.0 11.8 6.0 9.3 7.5 8.3 7.8
    GDP at factor cost 7.3 6.2 6.1 6.0 6.4 6.1 6.2 5.0 3.8 5.2

    The quarterly GDP numbers which were announced only recently by the Central Statistical Organisation (CSO) once again highlight the need for urgent action to kick start the Indian economy. Both agriculture and industry have turned in a disappointing performance. Infact, apart from the Mining and Quarrying group, all other groups have recorded de-growth in FY01. Indeed, the scenario is worrisome especially when viewed in the context of the our target of over 8% GDP growth.

  • More on Indian Economy

    Let's first take agriculture. This sector supports nearly two thirds of the Indian population. Despite that no substantial reforms have been initiated in the sector over the last decade (only recently the government has given a boost to the food processing industry). The result of this indifference has been that productivity continues to be very low. Land reforms, irrigation, mechanized farming and other productivity enhancing measures are best left undiscussed. Not surprisingly growth in production has been very volatile - of the last seven years, four years have recorded a decline in agricultural production!

    The industrial sector meanwhile has been hit due to several reasons. One is that the 'derived demand' (from agriculture) has been sluggish. Second, the global economy has been slowing over the last couple of quarters creating an unfavourable environment for exports. Also, sluggish demand in the global economy has created pressures in terms of cheaper imports. Another reason for this sub optimal performance is that the demand from infrastructure sectors has failed to materialize in the manner that has been anticipated for several years now.

    Finally, the services sector, which accounts for over 50% of the Indian economy. This sector of the Indian economy continues to grow at a fast pace, even though it has recorded a marginal decline in growth rates. A look at the table of quarterly growth suggests that trade, finance and community services are the only sectors which have continued to grow steadily. This has lent stability to the overall growth rates. In coming years, as India becomes the 'back office to the world' this sector should continue to turn in a robust performance.

    This latest release on the Indian economy clearly underscores the need for urgent action to kick start growth. It is imperative that the government undertake measures to speed up investment activity in the infrastructure sector, initiate reform in the agriculture sector and at the same time take concrete steps to improve its financial health. However, such a prescription has been available to the government for several years now. Whether the government will finally bite the bullet is for anyone to guess. In the meantime let us not lose hope that the great Indian story will finally unfold.

     

     

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