The Hindu Business Line : Go for the turbocharger

THE TIMING SEEMED impeccable. Two days ago, the Prime Minister, Dr Manmohan Singh, exhorted the nation at the India Economic Summit in New Delhi to strive for a 10 per cent economic growth rate over the next two to three years, and appeared confident of closing the present year with the estimated growth of 7.5 per cent. The next day came results for the second quarter (July to September 2005) that confirmed a strong performance by the economy, which clocked an impressive 8 per cent growth. The numbers appear all the more noteworthy because at the start of the year, annual growth was not expected to exceed the seven per cent mark. When the Reserve Bank of India revised the estimate upwards to 7.75 per cent for the year as a whole in its mid-year review of the economy, it transmitted a higher level of confidence. A cumulative growth of 8 per cent over the last six months, compared to a 7 per cent over the same period last year, suggests dynamism in the economy and the distinct possibility that double-digit growth in GDP is not a dream.

But before the champagne is uncorked, it might be useful to train the spotlight more closely on the numbers to get a sense of how that growth rate really looks. The star performer is, as in the first quarter, the services sector, with a growth of 12 per cent — marginally lower than in Q1 (12.4 per cent), with financing, housing, insurance, real estate and business services notching up 9.9 per cent, up from 8.3 per cent in Q1. Manufacturing plays a supporting role with 9.2 per cent in Q2, having slipped significantly from 11.3 per cent in Q1. The agricultural sector is akin to the `junior artiste', with a growth of just two per cent, as in the first quarter. Now consider the infrastructure industries. Mining and quarrying, which includes crude oil production, has actually fallen (-1.1 per cent) conspicuously at a time when global petroleum prices were at their peak. It had recorded a growth of 3.2 per cent in the first quarter. Electricity, gas and water supply grew by just 3.3 per cent in Q2, against a growth of 7.9 per cent in Q1.

These data do not merely reflect structural shifts in the economy, as the policy-makers appear to think; they also suggest a skewed pattern of GDP growth brought about by selective policy-making. Successive governments since liberalisation began two decades ago, have found it easier to reform financial services and parts of the tertiary sector and watch investments pour in than to tackle the more vital and difficult terrain of infrastructure and agriculture. The consequences of such partial policy reforms are now visible in the pattern of GDP growth over the last three years. Policy-makers are aware of the need for the development of these sectors. Mr Chidambaram has successfully negotiated a special purpose vehicle through the Cabinet, his second attempt at state-backed initiatives to fund infrastructure. There have been pressures on banks to lend more to agriculture. The Prime Minister has stressed the need for more irrigation and core sector lending. But a specific agenda for policies that can galvanise investments in these sectors is missing.

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