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RBI review of economy Revitalising farm sector is the key

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For the economy to maintain its growth momentum on a sustained basis, the farm sector must be rejuvenated. The RBI's report asserts that the time is now ripe for a second Green Revolution to capture new market opportunities. There are quite a few challenges that will have to be overcome in other sectors as well, says S. D. NAIK.

THE REPORT emphasises that for the economy to maintain its growth momentum, the farm sector will have to play a more important role.
THE REPORT emphasises that for the economy to maintain its growth momentum, the farm sector will have to play a more important role.

S. D. Naik

With the economy recording an average growth of over 8 per cent in real terms for three consecutive years ending 2005-06, the Reserve Bank of India (RBI) has projected an optimistic near-term economic outlook. The RBI terms this performance noteworthy since it has been achieved in an environment of macroeconomic and financial stability. GDP growth accelerated to 8.4 per cent in 2005-06 from 7.5 per cent the preceding year.

However, the Report once again emphasises that for the economy to maintain its growth momentum on a sustained basis, the farm sector would have to play a more important role. The real GDP growth in the sector in recent years has been low and volatile. Against the Tenth Plan GDP growth target of 4 per cent per annum for the sector, the actual farm growth during the first four years of the Plan period averaged only 2 per cent per annum.

Industrial recovery

The continued recovery of manufacturing activity contributed substantially to GDP growth during the year. The industrial recovery that had set in during 2002-03 has been sustained on the back of expansion in domestic and export demand, increased capacity utilisation, augmentation of capacities and positive business and consumer confidence.

An impressive feature during 2005-06 was the double-digit expansion in both capital and consumer goods. Capital goods recorded 15.7 per cent growth during the year the highest since 1993-94. The overall index of industrial production (IIP) recorded a growth of 8.1 per cent during the year marginally lower than that of 8.4 per cent during 2004-05 led by sustained manufacturing activity. But for the sharp slowdown in mining and subdued growth in the power sector, the overall industrial performance would have been much better.

The investment climate improved further in 2005-06. The investment intentions registered in Industrial Entrepreneurs Memoranda recorded further gains during the year on top of the significant growth during 2004-05.

The process of mergers and acquisition (M&A) activities also gathered further momentum with the value involved in the acquisition deals rising over 70 per cent in 2005-06. Significant activities were also observed in the overseas acquisitions of foreign companies by Indian firms.

Industrial production continued its momentum during April-June 2006, with the sector recording 10.1 per cent growth compared to 10.4 per cent in the previous corresponding period. This was led by the double-digit growth in manufacturing activity which recorded a growth of 11.2 per cent during April-June 2006, the same rate as a year ago. Thus, the upturn in the industrial sector now appears set to enter the fifth year of expansion in 2006-07.

Services sector

The services sector recorded a growth of 10.3 per cent in 2005-06, maintaining the double-digit growth of the previous year and notably higher than the average growth of 8.6 per cent during the previous five years. The sector, thus, remained the key driver of growth during 2005-06, contributing almost three-fourths to the overall GDP growth.

The share of the services sector (including construction) in the overall GDP of the economy has risen from 46 per cent in 1990-91 to 61 per cent in 2005-06. The Indian software services sector, including ITES and BPO segments, continued to record strong growth in 2005-06. According to NASSCOM, the revenues of the Indian IT sector (including software services, IT-enabled services and hardware) exceeded $36 billion during 2005-06, almost 4.8 per cent of India's GDP.

These revenues were mostly on account of software and services exports, which grew by 33 per cent to reach 23.6 per cent during the year.

As a result of sustained high growth in software exports and other services, India's share in world exports has trebled from 0.6 per cent in 1999 to 1.8 per cent in 2004. This share must have touched about 2 per cent in 2005.

Since the total global software and IT services market is estimated to be $1.2 trillion, the growth potential for Indian software and IT services exports appears tremendous.

On the strength of the growing competitiveness of India's manufacturing sector, particularly in respect of industries such as automobiles and pharmaceuticals, the RBI has listed certain new opportunities for the sector in the emerging global scenario.

It says: India has the potential of emerging as a favoured manufacturing destination of the world, especially in respect of certain activities enjoined by the entrepreneurial dynamism and cost-competitiveness that the country enjoys.

New opportunities

Indian manufacturing industries have certain inherent strengths such as relatively inexpensive, adequate and highly skilled labour force, a large manufacturing base, vast domestic market as well as proximity to fast growing emerging market economies in the Asian region. Incidentally, a number of multinational companies, particularly in automobiles, auto-components and electronic hardware, have already initiated moves to set up their manufacturing bases in India.

The Review goes on to add that an economy of India's size and scope cannot afford to ignore the manufacturing sector. A substantial manufacturing base is essential to absorb the workforce and ensure sustainable growth of the economy. Moreover, a modern manufacturing sector is also essential for the development of a scientific and technological base, growth of the knowledge economy and for national security.

CHALLENGES

Of course, all is not hunky-dory. There are quite a few challenges that will have to be overcome to realise the full potential of the Indian economy. As the RBI review points out, improvements in infrastructure facilities will be critical to sustain and accelerate the current industrial growth.

Prevailing constraints in most critical areas such as power supply and urban infrastructure continue to impinge on the competitiveness of manufacturing activity. Apart from higher levels of investment, issues relating to governance and management will need attention.

Furthermore, the manufacturing sector, especially small and medium enterprises (SMEs), will have to gear up to meet the challenges that may be posed by Chinese imports; China has already emerged as the largest source of Indian non-oil imports. It would be necessary for the domestic manufacturing sector to continuously improve its productivity and competitiveness.

It is also pointed out that for the potential of manufacturing to be achieved, productivity of Indian labour needs to be improved further. Apart from improvements in physical and social infrastructure, this would,

inter alia

, require setting up of high quality industrial training institutes (ITIs). Furthermore, the economy will have to step up research and development (R&D) expenditure to improve its competitiveness in the global economy.

The most formidable challenge, of course, is to rejuvenate the agriculture sector through concerted efforts aimed at stepping up investment to improve irrigation facilities, use of water resources and rural infrastructure. The RBI review rightly asserts that the time is now ripe for a second Green Revolution with an emphasis on diversifying the farm sector further to capture new market opportunities.

Agricultural growth in the years ahead will have to largely come from improvements in the productivity of diversified farming systems with regional specialisation and sustainable management of natural resources, especially land and water.

(This article was published in the Business Line print edition dated September 6, 2006)
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