Not yet an upslope

Concerns emerge over manufacturing, capital use efficiency

The estimates of gross domestic product (GDP) for the fourth quarter of 2013-14 and, by aggregation, for the full year were published last Friday. They indicate that things were a little worse than the advance estimates made in February had suggested. While those had projected growth during the full year to be 4.9 per cent, Friday's numbers put it at 4.7 per cent, with the second half clocking 4.6 per cent. With all the uncertainties that the economy has dealt with over the past year and more - scams, policy paralysis, elections, the taper-induced rupee volatility and so on - it might well have been expected that growth would steadily decelerate over the year. However, it hasn't done that; somewhere between 4.5 and five per cent seems to have been established as a firm bottom, with the economy achieving this rate notwithstanding all the shocks it has been subjected to. That should come as a relief; things can't get any worse, they can only get better.

While the aggregate picture provides some comfort about the economy having bottomed out, the variations across sectors highlight the challenges the economy faces in trying to accelerate growth. Agriculture has been a relatively significant contributor during the year, growing at 4.7 per cent, well above trend. If the somewhat negative projections about this year's monsoon pan out, there will be a double whammy, with a negative base effect being intensified by the impact of the monsoon. Manufacturing declined by 0.7 per cent; the revival of this sector is unquestionably going to be a key factor in achieving higher growth aspirations. Construction and the omnibus service components of trade, transport, hotels and communication grew at 1.6 per cent and three per cent, respectively. Both of these are relatively labour-intensive, so this sluggishness does not bode well for employment growth. From the expenditure side, the greatest source of concern is the fact that the investment-GDP ratio was estimated to be 32.3 per cent during the year, slightly down from the 33.9 per cent recorded during 2012-13. These are very high numbers by any standards, but even with these levels of investment, growth in both years has been unable to cross five per cent. This indicates an abysmally low level of capital productivity, highlighting the problem of severe imbalances between investments in different sectors of the economy. In particular, a lot of money has been sunk into infrastructure projects, but the economy is yet to realise returns from these.

These patterns provide clear signals to the government with respect to its policy priorities. Restoring the balance between capacities in the country's infrastructure sectors, removing barriers to construction activity, and developing a multi-pronged strategy to make manufacturing competitive are three obvious priorities to induce a growth revival. But it is also quite clear from the persistence of this lower-limit rate of growth over two years that the problems are deep-rooted and there are no quick fixes available. This is the time for strategic thinking on the part of the government. Only a concerted and co-ordinated approach to address the several constraints to growth and employment will take the economy to a desirable growth trajectory. There is little room for error or complacency. The alternative is, of course, indefinitely hugging the bottom.