ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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India's Recent Economic Growth: A Closer Look

The Indian economy turned around after 2002-03, clocking a growth rate of 8.7 per cent per annum, based on an industrial recovery, a sustained growth in services (especially communications and business services), and growing exports during a boom in world trade. However, the poor and deteriorating quality of statistics seem to question the extent of the upswing. But the fact that growth has been underpinned by an unprecedented rise in the fixed investment to gdp ratio cannot be denied. For the first time, consumer credit in a low interest rate regime has boosted the demand (sweetened by fiscal concessions) for consumer durables and housing. However, the deceleration in agriculture (particularly foodgrains) and a decline in the share of fixed investment in infrastructure and industry cast doubt prima facie on the optimism about the future.

nagaraj@igidr.ac.in

GCF/GDPfc
FDI s share in total (right hand side) g (left hand side)
rs rd 9% 51% Housing
Gross profit t t tal net asset
Variations

1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99

http://mospi.gov.in/

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SPECIAL ARTICLEEconomic & Political Weekly EPW april 12, 200861If the above diagnosis is correct, then the view that the private corporate sector is the engine of the recent economic boom needsa serious correction. If so, then which sector accounts for the sharp rise in domestic savings and investment? It is the household sector, as it happens to be the residual. To be sure, thisqualification does not question the growth of aggregate savings and investment but the contribution of the private corporate sector. 4 ConclusionsThis paper sought to take a closer look at the statistical bases for studying growth in the industrial and services sectors that have boomed recently in India, and its proximate causes. As the quality of industrial statistics has deteriorated and the methodological bases for estimating the services sector’s growth are weak, there can be legitimate concerns about the true extent of the economic expansion. This is not to deny significant and rapid expansion of economic activity that has taken place across a wide spectrum of industries and services lately. While industrial growth seems widespread across two-digit industry groups and use-based categories, the services boom since 1991-92 is dominated by communications and business services accounting for 20 per cent of the incremental value added in services between 1991-92 and 2006-07. While the com-munications boom seems largely domestic-demand led growth, business services seem entirely export driven. The surge in growth is associated with an unprecedented rise of the fixed investment rate by about 7 percentage points to 33 per cent ofGDP in 2006-07. It is a construction led boom in private housing and road building, smoothened by access to credit at low interest rates. Merchandise exports grew at 48 per cent per year, in tune with the cyclical upswing in world trade. With decelera-tion in agriculture (particularly in foodgrains), and a decline in the infrastructure and manufacturing sectors’ share in gross fixed investment in the present decade, sustaining the high growth rate over a longer period appears moot. Is the private corporate sector the main engine of growth? Probably not, as its savings and investment are overestimated because of methodological deficiencies. Therefore, the rise in savings and investment has occurred in the household sector. Further, the deteriorating quality of data reporting for industry and unreliability of estimation of value added in communications and business services casts doubts about the real magnitudes of their growth, though one is not in a position to hazard a guess as to the extent of overestimation. If the dots of scepticism expressed in this paper are connected, does a picture emerge that is seriously different from the widelyheld view? Probably yes. If the proximate causes that we have suggested for the industrial turnaround are correct, then they seem to indicate the fragility of the observed turnaround. Our scep-ticism somewhat muddies the picture of the recent growth signifi-cantly enough to cast doubt on the optimistic scenarios portrayed.Notes 1 Unless otherwise mentioned, all economic statis-tics used in this paper are at constant prices. 2 For an official account, see http://mospi.nic.in/iip_intro.htm 3 For details, see Nagaraj (1999); Singhi and Mishra (1997). 4 The official web site (http://mospi.nic.in/iip_re-port.htm) clearly states: The National Statistical Commission set up by the government to suggest measures for improvement in the statistical system in the country took note of the deficiency in the qual-ity of all-India IIP compiled by CSO and made a number of recommendations of technical as well as administrative nature for improving the quality of the IIP. Some of the major recom-mendations of the NSC on the existing IIP are summarised below: (a) The base year of IIP should be revised quinquennially; (b) The item basket should be representative of the indices at two-digit level; (c) The source agencies should strengthen their statistical set-up so as to be able to ef-fectively monitor new units and new items; (d) The source agencies should establish con-tact with the manufacturing units through fax, e-mail, personal visits, etc; (e) The source agencies should seek the co-operation of industrial associations, state governments, etc, in improving the re-sponse from the manufacturing units; (f) Inclusion of items reported by less than five factories to be generally avoided. However, if such items are included, source agencies must ensure 100 per cent coverage in re-porting of data by such units; and (g)Robust estimation procedure must be adopted by the source agencies to tackle the problem of non-response of the manu-facturing units. 5 For a detailed account of the limitations of the es-timation methods for the services sector, refer to the set of papers published recently in the Economic & Political Weekly, September 15, 2007. 6 The dispute erupted when Ratan Tata, chairman, Tata Tele Services, accused GSM operators of inflating their subscriber numbers. Reportedly Yankee Group, a US based consultancy firm, found that the number of mobile hand sets sold in India (including the second-hand sales) to be less than the growth of mobile connections. On this basis, the subscriber base is claimed to be overes-timated by 10-15 per cent – a view that GSM oper-ators contest. Though we have not been able to find evidence, there is perhaps merit in the over-estimation argument. 7 An illustrative exercise, reducing communication to 80 per cent of the actual (toadjustforoveresti-mation of the number of cellular lines) and business services to one-fifth (the ratio is same as between the dollar value of GDP and PPP value of GDP) re-duces GDP growth rate from 6.2 per cent to 6 per cent and services growth from 8.2 per cent to 7.8 per cent for the period 1991-92 to 2005-06. 8 SIA news letter, December 2007, Table 1, “State-ment on year-wise/route-wise FDI equity inflow”. 9 RBI’s FDI inflow data as per international practices, reported in January 2008. 10 Annual Report, Ministry of Surface Transport, 2006-07, government of India.11 We have avoided presenting an average of annual growth rates over shorter time intervals, given high yearly variability in agricultural output. 12 Here is evidence to support our contention. As of March 2007, there were 0.7 million registered companies; only 43 per cent of them filed their an-nual returns till February this year (The Hindu, March 14, 2008). 13 ASI provides data by type of organisation. We have taken the private corporate sector to be sum of pub-lic and private limited companies. We assume that all public sector entities are included under (i) gov-ernment department enterprises, and (ii) public corporations. If anything, our method leads to an overestimation that only strengthens our argument.14 The obverse of what we described for the private corporate sector would hold for the household sector.ReferencesChandrasekhar, C P and Jayati Ghosh (2008): ‘How Big Is IT’,Business Line, March 11.CSO (2007): National Accounts Statistics: Sources and Methods, http://mospi.nic.in/rept%20%20pubn/ftest.asp?rept_id= nad09_2007&type=NSSOKulashreshtha, A C and Ramesh Kolli (1995): ‘Impact of Liberalisation on Data Collection’,The Journal of Income and Wealth, Vol 17, No 2, July.Nagaraj, R (1999): ‘How Good Are India’s Industrial Statistics? An Exploratory Note’,Economic & Polit-ical Weekly, Vol 34, No 6, February 6. – (2006): ‘Indian Investments Abroad: What Explains the Boom?’,Economic & Political Weekly, Vol 41, No 47, November 18.Government of India (2001): National Statistical Com-mission (Chairman: C Rangarajan), Ministry of Statistics and Programme Implementation. Shetty, S L (2007): ‘Status Paper on Database Issues of the Services Sector’,Economic & Political Weekly, Vol 42, No 37, September 15.Singhi, M C and J P Mishra (1997): ‘Industrial Produc-tion Statistics’, Paper No 20, Studies in Industrial Development, Ministry of Industry, Government of India.Sinha Roy, Saiket (2001): ‘Post-Reform Export Growth in India: An Exploratory Analysis’, RIS Discussion Paper No 13/2001, Research and Information System for the Non-Aligned and Other Develop-ing Countries, New Delhi.Rajakumar, Dennis J (2003): ‘How Real Are the Esti-mates of Corporate Investment?’Economic & Political Weekly, Vol 38, No 22, May 31. Veeramani, C (2007): ‘Sources of India’s Export Growth in the Pre-and Post-Reform Periods’, Economic & Political Weekly, Vol 42, No 25, June 23.
SPECIAL ARTICLEapril 12, 2008 EPW Economic & Political Weekly62Microsoft ADVT

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