Indias Recent Economic Growth A Closer Look

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Indias Recent Economic GrowthA Closer Look

• R Nagaraj
• Indira Gandhi Institute of
• Development Research
• Mumbai

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Facts

• Between 2002/3 and 2006/7 the economy grew
  annually at 8.7 - a close second to china
• Industry 8.8
• Services 9.0
• Accompanied by stable prices, modest BOP deficit
  despite spiraling oil prices India imports 70
  of its requirement.
• Creditable achievement by any yardstick.

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Industrial Growth
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Growth in Services

• Between 1992-2005
• Communications 23.3 per year.
• Business services 22 per year.
• Their combined share in services ? from 3.4 in
  1991/2 to 15 in 2004/05 representing 1/5th of
  the incremental output in services.

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Popular Explanation

• Private corporate sector led growth.
• Catalyzed by foreign private capital inflows.
• Step up in infrastructure investment.
• Judicious mix of industries, institutions and
  instruments has propelled the growth.

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How Credible is this View?

• We examine
• The underlying statistics.
• The proximate causes.
• We seek to provide a more nuanced explanation of
  the proximate causes that has a bearing on the
  question of sustaining the observed growth.

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How Accurate are the Nos?

• Industrial statistics have deteriorated
• Replacing ASI with IIP has made them unreliable.
• In the liberal policy regime, firms do not care
  to supply production data.
• Communications and Business services (BS)
  estimates based on industry associations data
  are suspect.
• BS data on output is in dollar terms while inputs
  are in rupees, giving very high VA per worker.
  This partially explains why services employment
  does not show a corresponding ?.

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What are the Implications?

• Possible overestimation of value added in
  services.
• In industry, we are not in a position to even
  point to the direction of bias.
• Inference While we do not deny the higher growth
  in the recent years, the extent of the expansion
  is open to question.

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What Accounts for the Growth?

• A sharp rise in domestic saving and investment
  (Figure 1).
• A construction boom in private housing, and
  modernizing the road network.
• Crowding-in effect in automobiles.
• For the first time, credit-led boom in consumer
  durables in low interest rate regime.
• Export boom both in industry and services that
  is pro-cyclical.
• Industrial restructuring between 1996-02 helped
  industry gain its competitive strength a
  hypothesis.

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Is it Driven by Foreign Investment?

• No (Figure 2).
• Foreign investment accounts for 1.1 of domestic
  output.
• Between 2000 and 2007, 29 of FDI went into
  acquire existing equity.
• 22 of FDI represents re-invested capital- it
  does not represent fresh capital inflow.

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Role of Construction

• Reversal of the declining share of construction
  in fixed investment (Figure 3).
• ? in constructions share in public sector fixed
  investment (Figure 4).
• Though a ? in public sectors share in fixed
  investment.
• As a result of better roads, a boom in sale of
  trucks (Figure 5).

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Role of Consumer Credit

• ? in the share of consumer credit in total long
  term lending (Figure 6).
• ? in the shares of agriculture, and industry.
• One-half of consumer credit for housing (Figure
  7).
• Most of the rest for consumer durables (largely
  automobiles).

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What about Services Growth?

• Communications is domestic-led
• Deregulation, and entry of private firms.
• Technological change.
• Expansion by the incumbent public sector firms.
• Business services is export-led
• Tariff reduction led to software services boom.
• But, decimation of hardware industry.
• Telecom revolution gave birth to the outsourcing
  industry.

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Limitations of the Growth

• Agriculture performance has deteriorated (Figure
  8).
• Infrastructure investment other than roads
  still modest though improved somewhat (Figure 9).
• These are likely to constrain sustaining the
  growth.

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Is Corporate Sector Driving the Growth?

• Official figures show, private corporate sector
  constituting the single largest component of
  fixed investment.
• But this is incorrect, for methodological
  reasons.
• Therefore, non-corporate private sector
  continuous to account for the largest share of
  investment.

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In Sum

• The recent growth is credible, despite many and
  growing shortcomings in the statistics.
• The credibility of growth is underpinned by a
  steep rise in domestic saving and investment
  rates.
• It is a construction led boom, financed mostly by
  domestic investment crowding in private
  investment in trucks, cars and mobikes.
• Consumer credit at low interest rates lubricated
  sale of consumer goods.
• Boom in telecom, and export of IT and outsourcing
  services boosted the services growth.

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In Sum

• Deteriorating agriculture and inadequate
  infrastructure (despite much rhetoric) could
  constrain future growth.
• In the long term, Indias exports being
  pro-cyclical, down turn in world economy could
  affect India export oriented industries and
  services.
• Recent turmoil in the credit markets is surely
  going to affect medium term growth prospects.

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• Thank you

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Investment Ratios
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Foreign Investment Inflow
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Turnaround in Construction
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Public Sectors Role
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Boom in Truck Sales
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Rising Consumer Credit
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Composition of Consumer Credit
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Corporate Profitability Improves
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Deteriorating Agriculture
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Inadequate Infrastructure