India Grows at 8% in recent Qtr --means Telecom as an enabler will grow FASTER ..

Barreling on

Business Standard / New Delhi December 01, 2005

The economy continues to outpace forecasters, none of whom predicted either the 8.1 per cent GDP growth achieved in the first quarter, nor the 8 per cent now reported by the Central Statistical Organisation for the second (July-September) quarter. It is now more or less certain that growth in the full financial year will exceed the Reserve Bank’s upper limit forecast of 7.5 per cent. If achieved, that will take average growth in the 2003-06 period to 7.6 per cent, matching the record of 1994-97, but recorded this time with moderate inflation and without macro-economic imbalances other than the growing current account deficit (for which, blame oil). These “advance estimates” of quarterly GDP, released a month earlier than the usual schedule, must have been available to the Prime Minister ahead of public release, making him bold enough to hold out the prospect of 10 per cent growth at the World Economic Forum’s annual event in Delhi a day earlier.

Well in 1950, agriculture accounted for 55 per cent of GDP; now its share is down to barely 20 per cent. This means that slow agricultural growth has much less of an impact on GDP now than half a century ago—which is one reason why droughts are not as devastating as they used to be. At the same time, services have nearly doubled their share of GDP, climbing from about 28 per cent then to approximately 54 per cent now. And since this is the fastest-growing sector, its impact on overall GDP too is magnified. If we were to apply today’s sectoral growth rates for agriculture, industry and services to the economy and the sector shares of the 1950s, GDP growth would have been a little over 5 per cent, not 8 per cent.

While the over-all growth numbers for the two quarters are almost identical, there are some important differences in the sectoral growth patterns. Manufacturing, which was a significant driver of first-quarter growth, slowed from its high of 11.3 per cent to a less exuberant but still flattering rate of 9.2 per cent in the second quarter. While this is largely a base effect, what is important is that the contribution of manufacturing to GDP growth is significantly less in the second quarter when compared with the first. The other components of the industrial sector—mining, electricity and construction—also slowed, most notably electricity from 7.9 per cent to 3.3 per cent. This has taken the over-all industrial sector from a healthy 9.7 per cent in the first quarter to a moderate 7.5 per cent in the second, slightly below the 7.7 per cent it achieved during 2004-05. The entire slack left by this deceleration has been taken up by services, which accelerated from 9.8 per cent in the first quarter to 10.1 per cent in the second. The most significant contribution came from the finance, insurance, real estate and business services category, which ratcheted up from 8.3 per cent to 9.9 per cent, reflecting the buoyancy in both banking activity and the financial markets.
This is not to downplay the importance of having reached 8 per cent GDP growth in the first half of this year, after averaging 7.6 per cent in the last two years. Instead, it is intended to show how structural change in the economy underpins the new numbers, and to emphasise that there is no real sector-wise acceleration. The point is important, because agriculture per se has not accelerated its rate of growth; if anything, it has decelerated to 2 per cent annual growth from as much as 4 per cent in the 1980s because of slow productivity change and under-investment. Similarly, industry used to grow at 7 per cent even in the Nehru years, and has done so through the last decade as well. The country’s industrial momentum therefore has not undergone any real change, except in the last couple of years. But since the share of industry has grown, GDP gets an additional boost. The same broad statement goes for services, though not entirely so in this case.

What would add credit to India’s economic performance (creditable enough as it already is) would be to make each sector accelerate its pace of change. That is what would signal a true transformation of the economy. If agriculture were to double its pace to the 4 per cent growth rate of the 1980s, for instance, the impact on GDP would not be huge, resulting in only 0.4 per cent faster overall economic growth. The same impact on GDP would be achieved if services accelerated from the 10.1 per cent growth rate achieved in the last quarter to 11 per cent growth. But the impact in the countryside, on both employment and poverty levels, would be much more dramatic in the first case because agriculture still absorbs more than a third of India’s labour force, and accounts for the bulk of India’s really poor people. Also, the spread effects of a doubling of agricultural growth would be infinitely greater.

The flip side of this, of course, is that the structural change in the economy will continue, as the faster-growing sectors account for ever increasing shares of GDP. So, even if nothing else changes, overall GDP growth will continue to accelerate and could reach 9 per cent within a decade, even without any other change in the economy. The other cheerful aspect of the last three years’ economic record is that it is significantly better than what had been forecast in Goldman Sachs’ BRICs report of 2003, where all that was postulated was that Indian GDP growth in the second half of this decade would be 6.1 per cent! Clearly, reality is set to trump the forecast