The Hindu Business Line : The number game

Numbers and statistics can fascinate but also terrify. For the past two years Indians have been seduced by good data on economic growth. Policymakers in the thrall of the highest GDP growth for the last two years have forecast even higher levels on the basis of positive indicators on many fronts — capital inflows, FDI, retail trade and, of course, manufacturing, as reflected in the Index of Industrial Production. Now the IIP for October has taken a nosedive, with a 6.2 per cent growth rate, compared with double-digit growth in the first half of the year. Just as one swallow does not the summer make, one month's poor performance alone does not imply rollback conditions. But the figure does invoke fear, and that is reflected in the fact that the Sensex also fell, leading the media to draw the obvious conclusion that the weak IIP had something to do with the fall.

Stock markets, however, also work on sentiments that are buoyant and positive, and the need for investors to book profits; so what appears obvious may not always be so. By the same token, economic indices may often hide more than they reveal. The one lesson that both the euphoric growth numbers reveal is that the economy's upward trajectory is scarred by the poor performance of some key sectors. The successive high rates in GDP growth have been predicated on the phenomenal growth of the services sector, followed by industry; within the latter, some core indices, such as electricity and mining, have been lagging behind over the same period. And, of course, the heart of the Indian economy — agriculture — has been beating ever so slowly, at two to three per cent growth.

This skewed growth pattern has equity implications because it rewards the growth sectors with more resources while punishing the failures, as it were, with less. But an equally critical effect of the uneven growth is the negative impact of non-growth on the growth sectors themselves. An expanding economy means deepening markets but in India the current prosperity is the result of demand and supply chasing each other in urban areas, by and large. The lack of effective demand and incomes in the rural areas creates speed-breakers for the performing sectors of the economy. It is too early to suggest the October IIP figures reflect, or portend, some kind of constraints on the economy. But even if it is a mere blip, more immediate pressures, like a climbing inflation rate, will erode even the existing demand by whittling away real incomes in the growth sector. This presents the policy-makers with few choices other than to engage, sooner than later, in systemic reforms of the hinterland.