Managing paradoxical trends

The key contribution of various industries to the growth of the economy of Tamil Nadu throws up divergent trends

What does the nature of economic evolution of a state hold for its various constituents? Let us examine the evolution of Tamil Nadu in the past decade. The past decade has seen the growth of services as a proportion of the GSDP (gross state domestic product) from 57.23 per cent in 2004-05 to 64.84 per cent in 2014-15. During this period, the contribution of industry declined from 31.65 per cent to 28.04 per cent and that of agriculture declined from 9.6 per cent to 6.11 per cent.

The sectoral contributions to the GSDP show some interesting patterns during the previous decade. The decline in the contribution of industry and agriculture is accompanied by an increase in the contribution of real estate and banking sectors, to the extent that one could even conclude that Tamil Nadu's economy has morphed into a real estate-driven economy. However, in the decadal growth there are turning points in the sectorial contribution of various sectors to the growth of the state's economy.

The four key turning points of the decadal growth of Tamil Nadu occurred in 2007-08, 2009-10, 2011-12, and 2012-13. In 2007-08, the contributions of agricultural and manufacturing declined substantially, while the construction, real estate and banking sectors' contribution to growth increased significantly. In 2009-10, the above trend reversed itself in all the aforementioned sectors. In 2011-12, agriculture's contribution to the economy gained, while those of manufacturing and construction declined and those of real estate and banking increased. In 2012-13, the contribution of agriculture and construction declined substantially, while those of manufacturing, real estate and banking sectors increased substantially.

The common trends across the sub-periods of the decade are that the construction sector's contribution declined steadily after the first sub-period, real estate and banking have always moved in conjunction, agriculture and manufacturing have moved in conjunction for the first two sub-periods and have shown opposite trends in the subsequent two sub-periods. The two paradoxical trends in the sub-periods are interesting to examine from a point of view of complexity science application.

The first paradoxical trend noticed in the first half of the period is that whenever there is an increase in the contribution of agriculture and manufacturing sectors, there is corresponding decrease in the contribution of real estate and banking to the state economy. If we did an impact and influence modelling of this paradoxical trend, it turns out that an increase in the contribution of agriculture should lead to increase in consumption and, hence, an increase in the sale of durables, appliances, two- and four-wheelers and home loans among others.

An increase in the contribution of manufacturing should potentially lead to an increase in wages and, hence, an increase in discretionary expenditure and consumption. This should potentially result in increased demand for real estate and banking services among others. This did occur in 2007-08, while in 2009-10 the contribution of real estate and banking services declined. This contra-behaviour to economic expectations in 2009-10 is interesting from a temporary trade or arbitrage point of view.

The second paradoxical trend, noticed in the second half of the decade, is that even if the contribution trends of agriculture and manufacturing are divergent, the contributions of real estate and banking are increasing. In this case, the rural-urban divide could possibly explain this trend. If agriculture's contribution increased and that of manufacturing decreased or vice-versa, either of consumption or wages would accordingly increase or decrease leading to a mixed effect on real estate and banking services. Depending on the stronger influence of either agriculture or manufacturing, it is likely that demands for both real estate and banking services would increase.

The author is associate professor, Complexity Research Group, Institute for Financial Management and Research