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Which parts of the economy are growing?

CP CHANDRASEKHAR JAYATI GHOSH | Updated on March 08, 2018 Published on September 12, 2016

All’s quiet On the industrial front   -  GRN Somashekar

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Recent growth in national income seems to have become even more service-sector driven, and by activities that do not augur well for future growth increases

The controversy surrounding the new methodology adopted by the Central Statistical Organisation to estimate the national accounts seems to have diverted some attention from attempts to examine them. Since these new estimates are now all we have for the recent period, and are supposedly more in conformity with international practice with respect to the System of National Accounts, it is worth seeing what these new estimates can tell us about the nature of recent growth.

Among the sources of scepticism with the new series, the most significant has been that it led to a significant increase in GDP growth rates as compared to the earlier series. Thus the increase in GDP in 2013-14 has been estimated as 6.9 per cent in the new series, compared to only 5.0 per cent in the old series. The new series has indicated generally buoyant growth for the most part, making India apparently the fastest-growing major economy in the world at present. Chart 1 shows the quarterly rates on GDP growth (on a year-on-year basis) which suggest that for the most part, and especially since mid-2014, GDP growth has generally been more than 7 per cent on average.

Unclear indicators

The reason this has been contested is because none of the other significant macroeconomic indicators appeared to support such robust growth. Investment rates have been declining; agriculture has been in poor shape; electricity consumption and freight transport have been sluggish; in the recent period both exports and imports have declined in absolute terms; quick surveys of employment by the Labour Bureau in eight key sectors indicate falls in some years and only marginal increases in other years.

So if there has indeed been such relatively rapid increase in GDP growth, why is it not showing up in at least some of these other indicators? More precisely, which sectors have been growing? Chart 2 provides a slightly more disaggregated look at output growth by major sector.

Some features stand out immediately. First, the services sectors are the ones that have been growing the fastest, particularly FIRE (finance, insurance and real estate along with associated professional services) and trade, repair, hotels and restaurants, followed by slightly less dynamic growth in transport, storage and communication. Second, construction, which was a major engine of growth in the previous boom until around 2010, appears to have subsided. Third, agricultural growth has been expectedly muted and even negative in one year.

Fourth, manufacturing growth has been only moderate at best over this period. This is despite the new reliance on company accounts data from the ministry of corporate affairs, which is declared to be more inclusive of all manufacturing-related activities than the Index of Industrial Production (which formed the basis of the manufacturing estimates in the earlier national income series). Only in 2015-16 does there appear to have been a significant acceleration of manufacturing value added — but since these data are still provisional, it may not be appropriate to attribute too much to this one number as yet.

Basic tendencies clarified

A consideration of the sectoral components of growth over the past four years provides an even clearer picture of the basic tendencies. Simply put, the economy has become even more service-dominated than before, and that too in services that are not associated with much employment increase and where productivity measures are largely meaningless. Chart 3 show that over the entire four-year period, services of various kinds accounted for as much as 68.7 per cent of total GDP growth. Meanwhile, manufacturing provided only around 18 per cent, slightly less than the service activities comprising trade, repair, hotels and restaurants. The deceleration in construction is evident: it contributed only 5 per cent to the total increase in GDP over this period.

What is more startling is that some of the biggest contributions to GDP growth came from FIRE (30.9 per cent) and public administration and defence (12.5 per cent). Indeed, these two sectors together accounted for 43 per cent — or nearly half — of all estimated increases in economic activity in the past four years. This is what makes recent growth so problematic, because expansion in these sectors is not suggestive of a good foundation for future stable growth.

In the case of public administration and defence, if the expansion in this sector were a reflection of substantially increased public expenditure on basic social services such as health and education, this would be seen as something positive. However, this has not been the case. Indeed, it is not even likely that the increased “output” in this sector has involved more employment. According to the Economic Survey 2015-16, between 2005-06 and 2011-12 (the latest year for which data are available) formal public employment at all levels (Central and State government, local bodies and quasi-governmental bodies) actually declined by 5.8 lakh to 176.1 lakh. It is unlikely that it has increased much thereafter, given the official attitude to such employment and the evidently niggardly attitude towards social spending displayed especially by the Centre. So the increase in output is essentially the result of more consumption of various goods and services by the Government as well as direct and indirect salary increases (such as for dearness allowance). This is hardly a reason for much celebration, especially as the increased output in his sector does not seem to be accompanied by significantly enhanced public provision of essential goods and services.

Bubble waiting to burst

The case of the FIRE sector may be even more troubling. There is now more than enough international experience to indicate that rapid increases in this sector are not a healthy sign of solid economic expansion, but rather an indication of a bubble economy that is likely to burst at some point. Over 2015-16, the FIRE sector accounted for a whopping 21.6 per cent of total GDP (or Gross Value Added at Basic Prices, as the new series describes it). By the first quarter of 2016-17, the share is estimated to have gone up to 23.2 per cent.

This sector contributes very little to employment, except indirectly, through whatever multiplier effects are generated by those employed in it. It also hardly adds to productivity increases, since it essentially reflects asset price changes and associated changes in remuneration of those involved in it. Indeed, its expansion cannot really be described as indicative of anything other than a speculative boom. Since the increasing share of these two sectors also implies a shift within the economy away from tradable activities to non-tradable activities, this also has adverse implication for external competitiveness and raises concerns about future sustainability of the current expansion.

This decomposition of recent Indian growth may explain some of the contradictions in the new estimates. But it lays bare the unsustainable nature of the current economic expansion.

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Published on September 12, 2016
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