Slowdown in services

The sector needs a reforms push

Recent national income data confirm the suspected slowdown in services sector growth. While agricultural sector growth is holding up overall growth numbers, weak industrial sector performance is now being followed by weak services sector performance. This trend could continue if government spending is curbed to control the fiscal deficit. The seasonally adjusted services sector business activity index (SSBAI) fell to 49.8 in September 2011 from 53.8 a month ago. An SSBAI score of 50 or above suggests the economy is growing, while a score below 50 indicates that the economy is contracting. More to the point, this is the first time since April 2009 that a contraction in service sector growth has been witnessed. This decline is mainly owing to a slowdown in the IT and ITES industries (due to dampened demand from the US and the European Zone) and financial services (due to a combination of a slowdown in banking activity and volatility which is keeping investors away from stock markets).

The index of industrial production numbers for August reflect a pattern that has been in evidence for the past few months. While manufacturing as a whole grew by 4.5 per cent year-on-year (compared to 4.7 per cent in August 2010), the mining sector contracted by 3.4 per cent (5.9 per cent in 2010). Both capital goods and consumer goods registered a slight decline compared to the previous year. The only silver lining was provided by the electricity sector, which grew by 9.5 per cent in August 2011 (compared to just one per cent in August 2010). The sharp improvement in performance in the electricity sector can be readily explained by the surge in generating capacity, even if the pace of accretion could do a lot better. The mining sector continues to be plagued by a variety of roadblocks, ranging from land acquisition and rehabilitation to obtaining environmental clearances. To compound difficulties, the belated discovery that several private sector firms that have been awarded concessions simply do not have the requisite experience to deliver is not helping either. An overhaul of the mining sector needs to be undertaken without delay, not just for the sake of the sector, but also for its impact on downstream growth.

The agriculture sector’s improved performance of FY 2011 is largely owing to abundant and well-distributed rainfall and the increase in acreage for major crops. The output of rice and wheat during FY 2012 is expected to match all-time highs, while the production of other major crops like cotton and sugar is also expected to bring cheer. In fact, it has almost been an embarrassment of riches leading the government to open the sluice gates by permitting limited exports. An increase in rural incomes as a consequence may prop up domestic consumption, but even for this to be sustained India needs to boost industrial output and services growth. Also, retail sector liberalisation and reform and agricultural market reform can help boost services sector growth. The government must push ahead with reforms aimed at stepping up the rate of investment and savings and factor productivity across all sectors.