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Shankar Acharya: India's growth - trends and imbalances

Unusually for the post-reform period, fixed investment has fallen relatively since 2008

Shankar Acharya 

Most people are familiar with the trajectory of India’s economic growth in the last 20 years, since the external payments crisis of 1991. Just to briefly refresh memories, following three decades of growth at below four per cent a year between 1950 and 1980 and the modest acceleration to 5.4 per cent in the 1980s, the external payments crisis of 1991 triggered wide-ranging economic reforms, which raised the GDP growth rate to 6.6 per cent in the five years from 1992 to 97. Then came the East Asian crisis, a succession of poor harvests, a couple years of fractious coalition governance and renewed fiscal profligacy, which combined to drag down the economy’s growth to the pre-reforms average of 5.4 percent in the six years from 1997 to 2003. Fortunately, under National Democratic Alliance (NDA) governments of 1998-2004, economic reforms revived and, together with the ensuing global economic boom, laid the basis for the exceptional surge in economic growth in 2003-08, averaging almost nine per cent a year. In the next four years, 2009-12, India weathered the initial down-draft from the global economic crisis quite well, only to be tripped up by mounting deficiencies in domestic economic policies, which saw growth drop to 6.5 per cent in 2011-12 and below six per cent in the current year. Thanks to the initial resilience, average growth for the four years 2009-12 came to 7.5 per cent, which now looks quite enviable, from the perspective of the first half 2012-13 result of 5.5 per cent.

The point of this column is not to rehash this well-trodden ground. Rather, the purpose is to look at some of the broad trends in the composition of growth (by major sectors and expenditure components) embedded in the national accounts data of the past two decades, and to highlight a few key points. The last 20 years have been partitioned into four sub-periods: the initial, reforms-fuelled growth surge of 1992-97; the next six years of moderate growth in 1997-2003; the remarkable five-year boom of 2003-08 and the most recent four years of deceleration in 2009-12.

Let us begin with the sectoral growth patterns in the upper panel of the table. Inspection reveals some noteworthy trends:

First, the reforms-led growth burst of 1992-97 was remarkably well-balanced, with agriculture contributing a fifth of the total growth, industry (excluding construction) over a quarter and services (including construction) just over half.

Second, industry was particularly dynamic, contributing well over its early nineties share of 20 per cent in GDP.(Click here for table)

Third, the next three sub-periods are much less “balanced”, with the services sector accounting for the predominant share in GDP growth, amounting to as much as 80 per cent in the periods 1997-2003 and 2008-12, and almost 70 per cent in the exceptional growth boom of 2003-08.

Fourth, agriculture contributed little in these three sub-periods and, as a result, saw its share of GDP halve from nearly 30 per cent in the early 1990s to less than 15 per cent in 2009-12.

Fifth, while the contribution of industry to GDP growth fluctuated (and never again attained the level achieved in 1992-97), the share of industry in GDP remained fairly static at 20 per cent throughout.

Sixth, this meant that the entire drop of 15 per cent in the share of agriculture in GDP “accrued” to services, whose share rose steeply from 51 per cent in the early 1990s to 66 per cent in 2009-12.

India's growth - trends and imbalancesThis dominantly services-led growth pattern is certainly better than an alternative of more sectorally balanced but slower growth. However, as I have pointed out elsewhere (Business Standard, December 23, 2003), it does raise issues of sustainability for the long run. It is also surely worrisome to see the prolonged stagnation in the share of industry, of which four-fifths is accounted for by India’s stunted manufacturing sector. Of related and perhaps greater concern is the slow change in the sectoral composition of India’s labour force: although agriculture’s share in GDP has dropped below 15 per cent, the sector’s share in total employment remains worryingly high at 50 per cent or so. This is essentially because of slow growth of employment in services and industry (see my article in Business Standard, December 10, 2009).

Let us now turn to the demand or expenditure side of the story for some noteworthy points (see lower panel of the table):

The big story here is the role of investment demand (fixed and other), especially during the boom of 2003-08, when it surged to account for 64 per cent of the increase in aggregate expenditure. Even during the less dynamic periods of 1997-2003 and 2008-12, investment demand contributed 35 per cent. These increases raised the share of aggregate investment from 23 per cent in GDP in the early 1990s to 38 per cent in 2009-12.

On the other hand, the decline in the relative contribution of investment, especially fixed investment, in the most recent years of 2008-12 is a cause for serious concern. The rising share of investment in stocks and valuables (notably gold) in GDP in recent years is also a mixed blessing, as much of it reflects excess food stocks and additions to gold hoards.

Third, private consumption demand has contributed less than its GDP share in all periods to propelling growth. As a result, the share of private consumption in GDP has fallen from 66 per cent in the early nineties to 58 per cent in 2009-12.

Fourth, the other component of demand that has fallen, to make room for the rise in the share of investment in GDP, is net exports of goods and services, that is, exports minus imports. This has gone from -0.9 per cent of GDP in 1990-93 to -6.7 per cent in 2009-12 and is reflected in the sharp increase in the current account deficit in the balance of payments in the last three years.

Fifth, the contribution of government consumption to aggregate expenditure growth has waxed and waned, typically falling during periods of fiscal consolidation and rising during periods of fiscal profligacy. It is surely no comfort that the most recent period of 2008-12 has been one of renewed fiscal excess, especially given that such periods have coincided with times of lower economic growth.

To achieve more balanced and faster economic growth in future, investment, exports and industry have to grow much faster than they have in recent years.


The writer is Honorary Professor at Icrier and former Chief Economic Adviser to the Government of India.
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First Published: Thu, January 10 2013. 00:59 IST