Back on a growth path
In two consequent quarters, the Indian economy has witnessed growth figures bordering 9%. The present outlook on the annual figures looks forward to the heydays of 2006-07. However, there are some caveats to the story that need to be remembered.

Recently, the Central Statistical Organisation (CSO) came up with some cheers. According to the CSO, our economy grew at 8.9% in the second quarter of the current financial year, namely in the period July to September. 8.9% growth figures is a very high figure. To put in context, the best performance that our economy had in the past was around 9.3% in 2007, which constitutes the heydays of Indian economy. Over the last couple of years, we have witnessed a growth rate of 6.7% in 2008-09 and 7.4% in 2009-10. This current estimation, following the 8.8% growth in the July September quarter, is a sure sign of a resilience of the economy. All this, coming post global economic crisis, adds to the joy of all.

Now there are jubilations and talks of 9% annual growth rate as a possibility. The Finance minister Mr Pranab Mukherjee himself is on record admitting that he thinks it to be a distinct possibility, and has been backed by the Governments’ Chief Economic Advisor Dr. Kaushik Basu, and also by other experts like C. Rangarajan (Chairman of the Economic Advisory Council to the Prime Minister).
An economy is measured in terms of Gross Domestic Product or GDP. GDP measures all economic output, including goods and services, in monetary terms. There are mainly three sectors in the economy, agriculture, manufacturing and services. The outputs of each sector combine to form the total GDP. The breakup of GDP according to each sector’s contribution is called the ‘sectoral composition’.

This output must match the total expenditure in the economy as well, and this is called the national income accounting. Expenditures are calculated under mainly three heads, consumer expenditure, government expenditure and Investments.

Any growth figure calculation captures both the production (sectoral composition) and the expenditure. So, let us look into the newly released CSO figures in details as per these breakups, to try and understand what actually has happened over the last quarter.

MANUFACTURING SECTOR
Manufacturing sectors’ performance has been weak over the last few quarters. From 16.6% in the period January to March this year, it slipped to 13% in the period April to July and 9.8% in July to September. The quarter to quarter fall recorded is due to fall in industrial output which has witnessed a steady decline from 14.99% in July to 6.91% in August and finally to 4.4% as recorded in September. It might be added that the current figures for manufacturing was higher than 8.4% in the same period last year. However, the recorded slip over the last few months is surely signs of worry.

SERVICE SECTOR
The services sector has grown by 9.8% in the second quarter this year, higher than 9.3% in the previous quarter. However, Dr. Kaushik Basu believes that the services sector has not really performed as per expectations and expects higher figures in the next quarter.

AGRICULTURE SECTOR
This is one sector that was very badly hit last year due to drought like conditions, and actually witnessed a contraction in the third quarter last year (September to December 2010) because of the failed monsoons. But this, year agriculture has shown steady recovery. 2.5% in the first quarter. The present figure of 4.4% for the second quarter is a surprise and reasons of joy. Given that this years monsoons has been better, it is expected that third quarter figures too will show robust growth, adding to the cheers.

EXPENDITURES
Given that agricultural sector supports the largest proportion of our population, it is not surprising that private consumption figures have shown a rise from 7.8% in the first quarter to 9.3% in the second quarter. Investments on the other hand fell from 19% in the first quarter to 11.1% in the second. Government consumption over the period has been almost the same; 9.0% in the first quarter and 9.2% in the second. Focusing on this form of breakup of growth figures (technically, this is called GDP by expenditure) is perhaps more important than just looking at the sectoral composition, as it shows what really is triggering the growth process. From the above breakup, it is clear that the money you and I spend in your daily lives is what is triggering this growth. However, one must also remember that we have had to spend more because prices have been rising under inflation. So, on one hand, the improvement of the agriculture sector has enabled the large section of population to spend more, and the rising prices have compelled everyone to shell out more money for the same products. How much of this rise in consumer expenditure is due to inflation can only be understood once the proper calculations are done.

CONCLUSION
So, how do we interpret the new growth figures? Is our economy really back to its good old days? Repeated references to 2007 are sure signs that many are trying to hint that it is. I would hate to be a party-pooper, but I feel there are some pointers that need to be kept in mind before giving into any euphoria.

Fall in investments is surely a bad sign. Unless investments are made today, productions cannot take place tomorrow. The fall in investment figures along with the fall in manufacturing sectors’ output (from the sectoral composition analysis) clearly shows that our economy is not out of trouble yet. Manufacturing today contributes around 16% to GDP only. Indian GDP’s sectoral composition is an issue of many studies, simply because historically, all developed countries achieved their status on the basis of strong manufacturing sector, while we bypassed the entire process and hooked on to services. In comparison, even China has followed the much traditional path. The merits and demerits of such a growth are highly debated, and only time can be the best judge. However, a shrink in the manufacturing sector essentially means a fall in Gross Fixed Capital Formation in the economy. Capital investment forms the core of national assets, and capital investments are the backbone for the development of any economy. Even though the service sector has added a new dimension to the composition of our economy, it essentially entails lower capital investment (the main reason why we were so successful in this formula in the first place). Thus, even though our present growth figures maybe attractive, we are missing out on capital assets that would lead to greater good in the long run.

Much of this problem is due to the high inflation that still persists. The current inflation rate, despite all reigning in is still over 8%, which is way higher than 4-6% inflation rates of 2006 and 2007. I had written earlier on the budget review that there would be growth and high inflation. Unfortunately, that is being borne out. This high inflation and global situations is what is tying down the investments and manufacturing sectors performance. This is very different from the scenario of 2007, and this is the present situation should not be considered similar to that of 2007, even though the growth figures might be similar.