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Manufacturing catches up in
India
By Kunal Kumar Kundu
India's economy is estimated to grow by
6.9% in the current financial year (2004-05). This
is on top of the 8.5% increase (the 2003-04 growth
figure has been revised upward from 8.1% to 8.5%)
registered in 2003-04. As per the "advance
estimates" of national income released by the
Central Statistical Organization (CSO) recently,
the 6.9% growth in the country's gross domestic
product (GDP) during 2004-05 would be propelled
mainly by industry and services. While the
industry is estimated to grow by 7.8% (against
6.6% in 2003-04), the growth rate for services is
marginally lower (8.9% against last year's 9.1%).
This is a welcome development given
India's susceptibility to monsoon. Every time the
monsoon plays truant, India's GDP growth flags.
Only once in the past has the economy registered a
growth rate in excess of 5% even when agriculture
performed poorly - in 1995-96, in the midst of the
short-lived investment boom of the mid-90s.
Despite the services sector
becoming India's main engine of growth (accounting
for more than 50% of India's GDP), there's no
gainsaying the fact that India is still an
agrarian economy with close to 70% of the
population depending on this sector. The
agricultural sector, which continues to be highly
monsoon dependent, has been one of the most
erratic.
The simple co-relation
between the GDP growth rate and the agricultural
sector from 1995-96 till date is as high as 0.78,
more than double the corresponding co-relations
with industry and the services sector. For a
change, this year, though the agricultural sector
is expected to show a major drop in growth with an
expected growth rate of a mere 1.1%, India's GDP
growth is expected to be buoyant. This is largely
because of the manufacturing sector, which is
expected to grow at a faster pace even as the
services sector is likely to record a slightly
slower growth rate.
According to CSO estimates,
the share of the manufacturing sector to GDP
growth is likely to be 22% in the current year. It
was a mere 14% in 1993-94. The resilience seen in
industry and services has been particularly
pronounced in the case of the "manufacturing" and
"trade, hotels, transport and communication"
sub-sectors, which are expected to 
grow by 8.9% and 11.3% this year. Last year, these
sectors grew by 6.9% and 11.8%. This is a clear
indicator of a genuine underlying growth momentum
in the economy. In fact, the index of
manufacturing has been rising continuously this
year, recording a growth of 9% for the first nine
months of the current financial year as compared
to 7.2% in the last. Except for the month of
November, the monthly manufacturing index has been
higher for all the months of the period under
consideration as compared to the same period in
the previous year.
The investment rate also picked up
by 1.5 percentage points to 26.3% of the GDP
though it is still marginally lower than the peak
rate of 26.9% achieved in 1995-96. The quality of
investments in 2003-04 was equally impressive,
with the capital spending well spread out across
the economy. Real investment levels - after
factoring in inflation rates - went up by 12.5% in
agriculture-related activities, 19.9% in industry
and 21.8% in services. Industry accounted for as
much as half of investments in the economy.
The investment spurt is also
corroborated by the Economic Survey recently
released by the government. According to the
survey, the  investment rate of
26.3% is the highest in seven years. The current
account deficit indicates an excess of investment
over savings. As a sign of continued bullishness,
the capital goods industry has been clocking
impressive performance this year. For the first
nine months of 2004-05, the capital goods index
rose by a whopping 13.3% as compared to a growth
of 10.1% in the previous year.
According to the Economic Survey,
the industrial recovery noted in the past two
years has gained momentum during the current year.
Low interest rates and government spending on
infrastructure are the key reasons. Overall, the
outlook is positive. For the housing, car and
white goods segments, momentum remains strong. The
survey adds that the ongoing growth in
manufacturing is investment-led and fairly evenly
spread. Double-digit growth in the capital goods
sector is a sign of capacity expansion across
industries. Industrial growth, despite the
tsunami, runaway oil prices and deficient monsoon
clearly indicates the resilience of the Indian
economy.
The savings rate has been equally
impressive. As per the CSO estimate, the savings
rate has touched an all-time high of 28.1% of the
GDP. If this level of savings is maintained, the
economy will grow at 7% even if one assumes a
lower incremental capital-output ratio of 4. While
the estimated savings rate is high, a global
comparison puts things in perspective. According
to the World Bank, the average savings rate for
East Asia and Pacific is as high as 37%. Even for
low- and middle-income countries, the average rate
is 26%. China has a savings rate of a whopping
40%. The only country in the BRIC (Brazil, Russia,
India and China) to have a lower savings rate than
India's is Brazil, with 22%. Even Russia has
returned a savings rate of around 32%. So though
the savings rate in India is the highest at this
point, it still isn't good enough.
But
what is even more disturbing is India's inability
to absorb its savings as investment. The gross
domestic capital formation in India in 2003-04 was
as high as 26.3%, but lower than the savings rate.
Even in 2002-03, savings exceeded investment by
1.3% of the GDP. This is reflected in the current
account surplus that India has been recording.
Thus while current consumption is being postponed
to increase savings, which is expected to lead to
future consumption through increased investment,
India is actually lending its resources to other
countries. In reality, India should have drawn in
external savings through the current account
deficit. Fortunately, however, things seem to have
been reversed now and India is set to end up with
a current account deficit this year.
To
achieve and sustain the desired growth rate in
investments, more reforms are required, says the
economic survey. It outlines reforms in tax and
expenditure and labor laws as a priority and
favors the opening up of more sectors, including
retail, to foreign direct investment (FDI) and cut
down on wasteful subsidies. According to the
survey's prescription:
Customs duties should be aligned to ASEAN
(Association of Southeast Asian Nations) levels to
enhance competitiveness and export.
Revisit the issue of FDI caps in sectors like
coal, mining, insurance, real estate and retail
trade to transform Indian manufacturing into a
globally competitive entity. Opening up the retail
sector will organize a significant part of the
largely unorganized sector and invite established
global retail brands into the Indian market,
creating greater outlets for sourcing and
marketing Indian products.
Indian labor laws, particularly the Industrial
Disputes Act, allow firms less latitude than the
labor laws in China, Brazil or Mexico. For
business start-ups, a large number of clearances
have to be taken at the central and state levels,
introducing delays and creating avenues for
corruption. The labor laws must thus be changed.
Small-scale reservation has not succeeded and
constrains investment in some critical sectors.
There is little justification in continuing such
reservations since all such items can now be
freely imported.
With infrastructure constraining economic
growth, there is a need to find an appropriate
policy framework enabling public-private
participation in the sector. Telecom, roads, ports
and civil aviation have to be treated as thrust
areas.
Kunal Kumar Kundu is a
senior economist with a leading bilateral Chamber
of Commerce in India. He has a Masters in
Economics with specialization in econometrics from
the University of Calcutta.
(Copyright
2005 Asia Times Online Ltd. All rights reserved.
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