GDP: Pattern of growth matters more

Structural changes are rather disquieting, but rate of net investment sharply up, of late

The national income and related key aggregates released by the Central Statistical Organisation is a veritable mine of information and for the analytically-minded, it can throw up valuable insights in to the working of the Indian economy. This agency, which had begun the system of quarterly estimation of GDP just over a decade ago, is able to collect and collate the statistics needed for this complex exercise much more rapidly than in the past, so that, in stead of the usual three months’ lag, these estimates are now published with a lag of only two months.

The upshot of this speedy dissemination of facts and figures is that we are in a position to comment on the performance of the economy in a macro sense during 2006-07, when the next fiscal is only two months’ old. The 9.4% surge in GDP last year, coming on top of an impressive showing in the previous year - and the fact that, this has been largely led by the robust performance of the manufacturing sector - has been widely praised and rightly so. But, a dispassionate and detailed examination is necessary to show the economy, warts and all. Such a study reveals that not all is hunky dory and with the good, shades of gray also exist.

Consider the structural changes in the economy over the past eight years since the CSO shifted the base to 1999-00. True, pace of GDP has accelerated but, except in the last few years, this growth has been driven by the tertiary sector. What is particularly distressing is that the primary sector, led by agriculture, has fared rather badly. This is evident from the fact that the share of the primary sector in total GDP has declined from 25% to 17.5% in a span of just eight years.

Empirical evidence shows that, it is more due to the setback in physical output of the farm sector than due to depressed prices of agricultural commodities.
In fact, the official Economic Survey for 2006-07 points out that the prices of agricultural products ruled about 10% higher than those of manufactures for well over a decade, and, as of December 2006, the ratio of the prices of manufactures to agricultural items was only 87.3%.

So, the inference from the national accounts statistics is that all is not well in Indian agriculture and the sharp drop in the share of the primary sector in total GDP during 2006-07 should serve as a wake-up call.
Even in manufacturing, despite the recent improvement, the pace of growth has to be accelerated to provide a fillip to economic progress and to employment. In China, with whom we are often bracketed, manufacturing sets the pace of overall economic advance. In a word, our 9% GDP increase of late should not obscure the fact that the commodity-producing sector is accounting for a diminishing share, now compared even to a recent period like 1999-00 - 45% as compared with 50%. Whether at this stage of our development, the structural transformation is of the right type is an issue on which we must ponder over.

However, in one key area, we have fared well. According to CSO data, we have managed to invest more by curtailing our consumption expenditure. The share of gross capital formation has improved by nearly 10 percentage points between 1999-00 and 2006-07, because final consumption spending has been under leash during this period. Even the government - this includes the Centre, states and local bodies - has acquitted itself well in this respect, as is borne out by the drop in its share to 11.3% now from 12.9% eight years ago.

Perhaps, with the attention wholly riveted on the gross capital formation, we have lost sight of the fact that, as per CSO, India has also step up fresh investment in recent years. This is reflected in the spurt in the rate of net capital formation to more than 27% during 2006-07 from only 14.1% in 2001-02. This is a better indicator of the investment performance than the rate of gross domestic capital formation.

The latter includes the amount spent on renewals and replacement of machinery and equipment rendered out of use or subject to wear and tear. This is depreciation - or consumption of capital in the national income parlance - which denotes the amount earmarked for use in place of worn-out capital and is not the same as fresh infusion of capital. The big jump in the net capital formation rate as distinct from gross capital formation rate does suggest that India is able to attract investment to help buttress its economic growth.