The Hindu Business Line : Looking beyond that 8 per cent

The non-farming sectors have come of age and, going by the adage `the morning shows the day', this has important implications for the future. It can now be said that 15 or 20 years down the line India may not be seen as primarily a farm-based economy — a change in definition which could have a bearing on the country's status at the international negotiating table.

THE FIRST quarter GDP growth performance — at 8.1 per cent — is to be welcomed not just because it is higher than the 7 per cent of the preceding quarter (that is, January to March) but also because it has crossed the 8 per cent mark, which has become some sort of a psychological benchmark as far as the growth rate is concerned. In fact, it has always been the case that the moment the growth rate crosses 8 per cent, or has come close to it, a flurry of statements has resulted indicating how good it would be if the secular growth rate crossed that mark and stayed above it. This is what has happened this time too with the Finance Minister, Mr P. Chidambaram, saying that he would like to see the growth for the entire year (2005-2006) to between 8 and 9 per cent.

In fact, and not surprisingly, the Minister has gone a step further and compared the growth achievements of India and China, saying that the latter grew at more than 9 per cent and that he would be even happier if the country caught up with its neighbour. To quote him: "I am happy with the first quarter growth. But we are still second. We must strive to become the first."

This is a sentiment widely shared among fellow Indians, but the problem is that actual implementation of the wish is so hemmed in by obstacles — some of which are deeply entrenched — that to attach any importance to it at the moment would be nothing more than an essay in wishful thinking.

Much more sensible would be an exhortation to those who are directly involved with production, etc, to keep the growth rate at the 8 per cent level, and to do everything within their power to prevent it from slipping below it. As everyone knows, this is easier said than done, which actually throws into even sharper relief the unrealistic aspect of the wish to catch up with the Chinese and occupy the first place in the growth-rate chart.

Turning to the composition of the growth performance, there are two aspects which need to be highlighted because they throw light on two areas of the nation's economic performance important for the future. The first aspect is that the 8.1 per cent first quarter growth has materialised despite the slowdown in agriculture, the inference being that even in a predominantly farming economy like India, the non-farming sectors can do their bit in taking the overall growth rate to a new peak even when the farm sector has faltered. In other words, one can conclude that the non-farming sectors have come of age in an economy which has been historically categorised as an agricultural economy. Relying on the adage `the morning shows the day', this has important implications for the future because it can now be said with some confidence that 15 or 20 years down the line India will probably not be seen as primarily a farm-based economy, a change in definition which could have a bearing for the country's status at the international negotiating table.

The second aspect of the first quarter growth story is the slowdown in agriculture per se, which is not good for the national economy if only because more than half the population depends directly on farm production although the value of that output today forms no more than just about a fifth of GDP.

What this means is that a slowdown in agriculture directly hits the largest number of people as far as living standards are concerned and indirectly the fortunes of the rest of the economy which produces consumption goods in view of the adverse effect on demand from the farm-dependent population.

Further, food security today is not as serious a problem as it was a couple of decades ago in the sense that a slowdown today in the output of staple crops will not lead to an increase in imports to maintain normal food supply for the country as a whole. Even then, a slowdown in food production is certainly not in the best interest of the nation because, all said and done, a rundown of food-stocks is not preferable beyond a point.

Indications are that the Prime Minister, Dr Manmohan Singh, being a first rate economist himself, is aware of the seriousness of the situation. In fact, just last week he told a meeting of the full Planning Commission on agriculture that farming in the country would have to rejuvenated if only because of the huge population dependent on it. Among other things, he said that there were a number of indications — such as falling domestic and export demand — which suggested that unless specific measures were taken to boost activity in the nation's rural areas (through the National Rural Employment Guarantee Scheme, etc) the plight of the farming community would worsen. Specifically, Dr Manmohan Singh said: "A revival in the pace of farm growth is a must to provide a sustainable basis for expansion of rural employment and for raising real wages, both of which are necessary to alleviate poverty in rural areas."

Given the qualitative improvement in the non-farm sectors of the economy which, among other things, has led to satisfactory overall growth rates even in the absence of adequate support from agriculture, it is not without good reason that the point has been made that the "lack of growth (in agriculture) is said to be the biggest impediment to achieving a seven to eight per cent overall economic growth" on a sustained basis. But of course — to repeat — effective implementation of policies is the central point of all meaningful exercises (specially where reforms have to be instituted — say, in the cropping pattern, choice of crops, the introduction of alternative nutrients, etc) which again is easier said than done particularly under a political dispensation where every reform measure has to be hotly debated and defended.

There is one school of thought which does not think much about the first quarter growth performance on the ground that it is not sustainable because it is based on a "credit-linked consumer durable sales push and a speculative real estate and stock market boom," and that the economy "is living off cheap bank credit and plastic money".

In other words, it is felt that progress based on sizable growth rates in, say, infrastructure would be far more preferable because of the accretion in the economy's real-asset base, which would serve as the foundation for high-growth sectors such as services, FMCG, etc. This is, of course, true though the point will have to be made that growth (meaning higher income generation) should be welcomed wherever it occurs and whether it is sustainable or not because it would be quite foolish to debunk all growth stories just because the "real sectors" have not yet been touched by the growth impulses.

But for good growth rates in sectors that matter in the long run and which have a solid contribution to make in establishing the foundations of future growth (that is, the sustainable aspect), a satisfactory flow of savings is required. That flow will have to come either from the domestic economy or from overseas.

It also means that if the savings flow from the domestic economy is not enough to fuel adequate investments in the `core sectors' so to speak, savings originating abroad will have to be tapped, which is what Foreign Direct Investment is all about. The flow of FDI will depend on the investment climate within the country which, among other things, is a function of the political governance of the country.

As the Finance minister said on the garnering of surpluses for investment: "This requires that we must continue to reform the economy and liberalise it further, open sectors which are not fully opened and also those which are closed". Some things are easier said than done, like making statements such as this, which, though eminently sensible, are no better than a red rag in front of a raging bull in the current Indian political set-up.

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