The holes in the growth story

Following the release of the GDP figures, Finance Minister Chidambaram has claimed that the economy is on the path to recovery. He expected the growth rate to touch 5 per cent for 2013-14.
However, the detailed figures show a contrary picture. Compared to the second quarter of 2012-13, the performance of the economy is still somewhat worse, except for a couple of sectors.

Agriculture has shown a sharp jump in growth from 1.7 per cent in the second quarter last year to 4.6 per cent this year. Finance, insurance and business services have shown a growth rate pick up from 8.3 per cent last year to 10 per cent in the second quarter this year. Additionally, electricity generation and gas and water supplies showed considerable pace.

However, barring these select areas, the growth rate is lower — and sometimes the difference is quite sharp — in all other sectors of the economy. This is particularly acute in mining which is a basic upstream industry and provides the foundation for strong growth. Mining and quarrying growth rate dropped from 1.7 per cent last year to a negative zone in the second quarter of this year (-0.4).

This is, of course, nothing new. Mining and quarrying have been languishing for a long time now. And why not? Permission to open new mines is not available — environmental clearances for opening mines or acquiring land for mining projects are not coming through and acquisition is stalled midway. Without that, all you can do is flag the existing mines for more production. But there is a limit to that.

It is not reasonable to expect that India could hit a high growth trajectory without these sectors (mining and manufacturing) getting a much freer hand in starting new projects. Instead, we have been seeing a string of fresh mining proposals being abandoned. POSCO, Arcelor Mittal, Tatas or public-sector Coal India Ltd have all faced difficulties in the way of opening up new mines. Some of them have declared withdrawal of their projects.

Manufacturing has also suffered continuously for the last couple of years sometimes showing contraction. The latest figures show at best that manufacturing has remained flat at 1 per cent in the second quarter this year, against almost a similar figure of 0.1 per cent growth in the second quarter last year. Indeed, Indian manufacturing is languishing as everybody knows and we have been only talking about a national manufacturing policy or manufacturing zones for encouraging growth of manufacturing activities. Nothing has happened on the ground.

The proof of the pudding is in the eating. Try to get an electrical device manufactured in India. You will hardly come across one. Not even an electric kettle. You will find electric kettles under familiar Indian brand names of Indian companies. But scratch the surface and you will find somewhere mentioned ‘Made in China’. That goes for lamp shades too. Look at the figures of growth in manufacturing since the first quarter of last year. It was -1 per cent in the first quarter; in the second it was one-tenth of 1 per cent; this year in the first quarter it was again -1.2 per cent and now in the second quarter it is barely in the positive at 1 per cent. Would anyone call that a recovery of Indian manufacturing?

The trends shown by the figures are not one-off. These have been continuing for some time, at least for the last three years. What we are seeing is a gradual but secular fall in the performance of India’s industrial economy. Mining and quarrying, manufacturing or core sectors like coal, oil and gas, all are showing lacklustre performance, if not contracting. The latest core sector performance vindicates this. During April to November 2011-12, manufacturing and electricity generation showed growth rates of 4.1 per cent and 9.5 per cent, respectively. Compare this to their performance in April to November in 2010-11 of  9 per cent and 4.5 per cent, respectively.
Mining sector grew by 5 per cent during in 2010-11 while in 2011-12 it slipped into negative territory. Since the middle of 2012 manufacturing and mining are flat and sometimes contracting. Only on occasions are these showing signs of vitality.

There is, of course, a word of caution. One needs to be very careful while dealing with these large numbers. It is important to remember that these figures at best give you an insight into the way things are developing. The caution was best articulated by Raghuram Rajan when he was still the chief economic adviser in the finance ministry. He said there was not much point on poring over the decimal points. The figures give only an idea of the general direction of things. He was participating in the press conference, post the presentation of the Union budget, along with the present finance minister.

It is in that spirit that the GDP figures or the trends in prices should be approached. From that perspective, the latest figures further confirm the real lack of spring in the step. If you are claiming to be recovering and hitting the growth path when Indian manufacturing is growing by a mere 1 per cent, and mining is contracting, it can probably mean a show of desperation.

That should be alright for the developed economies where things are drifting and even 2 per cent overall growth is a sign of getting back into the growth trajectory. For a developing economy like India’s such muted growth rates are pointers to further action. The figures are to be read in that spirit.  From that viewpoint, the task is clear cut. There has to be a renewed thrust to push up industrial growth which generates primary demand. High industrial growth results in higher demand for services and, thus, in turn drives the growth process. This time we have shown a quarterly growth of 4.8 per cent plainly on the strength of the farm sector rebound and services growth, that too led by a small segment of the services economy.

However, growth impulse now cannot come from policy moves of the Union government. These have to come from some critical steps at the state level to make it easier for industry to expand: faster clearances for setting up new units, land allocation for industrial and mining projects, quicker decisions on environmental approvals. These are not soft options, but difficult to achieve on the ground. The Chinese at the end of their Third Plenum of the Communist Party are setting out to do something similar. These reforms should increase the economy’s capacity to absorb investment. We need to address these if India is to hit a high-growth path.

The author is a Delhi-based analyst and commentator