Services lets down, grows at slowest rate in 12 years

The largest segment of the Indian economy - services - was the biggest letdown in the second quarter of this financial year. The tertiary sector rose at an almost 12-year-low pace of 5.7 per cent in July-September, against 6.2 per cent growth in the first quarter this year and 7.1 per cent in the corresponding period last year, official data showed on Friday.

The pull down in services, which occupies over 60 per cent of the total gross domestic product (GDP), came from the community, social and personal services which mainly accounts for government spending as it grew just 4.2 per cent against 9.4 per cent in the first quarter. In the September quarter last year, it had expanded 8.4 per cent.

Even the trade, hotels, transport and communication segment rose only by four per cent, up from 3.9 per cent in the previous quarter.

Pronab Sen, chairman of the National Statistical Commission, explained to Business Standard: "Government services and communication are the two areas which led to a lower growth in this sector."

Sen said government services are calculated by taking into account the salaries paid multiplied by the number of people divided by the Consumer Price Index (CPI). He said this is a result of payment of dearness allowance which will be factored in only by October and the CPI remaining invariably high in the second quarter. "Hence, there is a reduction in the real income," said the former chief statistician.

Sen said another element that had under-performed is communication. "This has risen significantly lower this year", he said. He said this was mainly due to the flattened sale of mobile phones and also due to lower prices because of which the revenue per unit has not grown much.

In the transport segment, the net tonne kilometres in Railways grew 3.7 per cent, while passenger kilometres contracted 2.5 per cent in the second quarter of the current financial year. The sale of commercial vehicles fell 22.1 per cent, cargo handled at major ports rose 5.9 per cent, those handled by civil aviation grew 0.4 per cent and passengers carried by civil aviation gre 12.6 per cent in the second quarter of 2013-14, year-on-year.

Meanwhile, 'financing, insurance, real estate and business services' grew in double digits by 10 per cent in July-September, up from 8.9 per cent in the previous quarter. This had risen by 8.3 per cent in the same period last year. Experts said that this may be a result of higher bank credits.

"As the bond market is down, the borrowings from banks have increased in the second quarter which pulled up the growth in this segment," said Madan Sabnavis, chief economist from CARE Ratings.

An official statement, accompanied with data, said aggregate bank deposits and bank credits have shown growth rates of 12 per cent and 15.4 per cent respectively as of September, 2013-14.

Experts also said that this is a statistical aberration "This was made possible by the substitution of costly Commercial Paper and not any real economic activity," said Soumya Kanti Ghosh, chief economic adviser, State Bank of India.

The output of the construction segment rose 4.3 per cent in the second quarter, against 2.8 per cent in the previous quarter. This section grew 3.1 per cent in the corresponding period last year.

But experts believe that going ahead, this will see an uptick. "As stuck projects are getting cleared by the government accompanied by essential growth in construction of highways and roads, this segment will grow further in the next half," said Sabnavis.