All entries for Tuesday 04 October 2005

October 04, 2005

India on the Growth Bandwagon

SAAG Paper 1563, 04.10.2005

The Global Competitiveness Report 2005-06 published last week by the World Economic Forum had some surprises. While China slipped up by 3 spots, India climbed 5 places in the ladder. The Economist’s Global Foreign Direct Investment Index also saw India rise to second place below China in terms of espousing confidence amongst potential investors. However, what really made news in the business pages across the world was India ’s growth rate in the first quarter of 2005–06, which was up to 8.1%.

Indeed, the economy is “growing faster than expected”, according to the BBC. Up from 7.6% in Q1 of 2004–05, this is mainly due to “a robust growth in industry and service sectors”. Growth was particularly high in the manufacturing sector, which grew by 11% vis-à-vis the previous year, boosted by a real estate and infrastructure boom. Construction, for example, was up by nearly 8% compared to 5% during the same time last year. Within construction, cement and finished steel registered a growth rate of 10.7% and 6.7% respectively. Also high on the growth trajectory were trade, transport, hotels and communications, which grew by a whopping 12.4% compared to 11.5% in the last fiscal.

The increase growth figure thus justifies the record heights attained by the Bombay Stock Exchange just days prior to this report being published by the Central Statistical Organisation. It seems that the market grasped the strength of the economy far better than the government did. Just recently, the Securities & Exchange Board of India- the market regulator- was busy gagging the “senseless sensex”, fearing speculative forces were at play. However, even the markets underestimated India ’s growth prospects, as business lobbies pegged the rate to be around 7.3%. Even more mistaken, it seems, were the leftists who keep Prime Minister Manmohan Singh’s government in power in Delhi . Days before the release of this report, they were giving the Prime Minister flak over his “anti-people” reform policies.

On September 29th, the leftists called an “all-India strike”, forcing a shut down of public services and business across many parts of the country, supposedly in protest of the government’s reluctance to pay much heed to their populist demands. On September 21 and 22, there was a transport strike in West Bengal (whose “Marxist Chief Minister” is going out of his way to reform the state’s economy) over demands of increasing private transport prices. India ’s booming economy also shows why the country is the world’s largest opportunity cost- a tragic story of “what could have been”. If we subtract the cost of these strikes, and the myopic policies forced on the government by the leftists, economic growth could be notched up to 10% or more.

Two major questions remain. First, as the Finance Minister Palanippan Chidambaram said, “The not-so-good news is that agriculture in the first quarter of the current year has only grown by 2% as against 3.8% last year.” On face value, it may not appear to be too damaging, as only 20% or so of the $700 billion GDP is contributed by agriculture. However, its performance determines domestic demand in the other sectors of the economy, especially manufacturing, because dwindling crop sales could lower the disposable income of farmers, who form over 60% of Indian consumers. As India ’s foreign trade to GDP ratio remains considerably lower than, say, China , fluctuating domestic demand can create a problem for industry.

Second, there is an argument that much of the growth is being fuelled by excessive speculation. S. Gupta, a former member of the Planning Commission, said- “It’s hardly sustainable growth. It is based on a credit-linked consumer durables sales push and a speculative real estate and stock market boom. The economy is living off cheap bank credit and plastic money.” Indeed, financing and real estate outpaced infrastructure by miles, growing by 12.4%.

The latter is hardly fundamental in its damaging prospects. As mentioned above, SEBI has already taken stern action against some stocks with a high P/E ratio that were booming in the last few days. Real estate booms across India reflect real demand rather than speculation, as both businesses and people flock to urban centres. On agriculture, the government should start to think out of the box. It has witnessed successful co-operative ventures like Amul succeed in the countryside. Common sense entails that small marginal farmers cannot compete in a global market laden with subsidies and large agro-firms (both courtesy of the European Union and the United States ). To gain in size and take advantage of economies of scale is thus the answer. Moreover, joint ventures among farmers will qualify them for larger amounts of credit from rural banks that insist on sufficient collateral.

Perhaps the best news to have come out of this report is the modest rate of inflation. Sizzling growth is generally followed by high inflation- in this case there were record international crude prices to deal with as well. However, the wholesale prices index rose marginally to 3.75% at the end of last week from 3.5% the week before. Possible reasons could include the absorption of most of the price hikes by the nationalised oil companies and falling domestic prices in many sectors due to increased private competition. Moreover, even with the burgeoning sectors, the growth rate is from a low base. Therefore, there remains a strong possibility of sustained growth without major inflationary pressure.

A cause for concern is that growth rates in Q2 and Q3 of 2004–05 were lower than Q1, bringing down the annualised figure to 6.9%. Whether India can finally repeat or better the 2003–04 growth rate of 8.1% depends on the momentum of key sectors including agriculture and industry. The service sector- especially the information technology sector- seems to take care of itself for a few years now. For now, however, the “ India story” looks pretty- although, no one dare bring back the haunted term “India Shining”.

The author is based at the University of Warwick and takes a deep interest in the political economy of the Indian sub-continent.

Power Moves

The Telegraph, 04.10.2005

The India vote in favour of the US-backed resolution at the IAEA meet, marks a new beginning in the foreign policy of the fourth largest economy of the world. It is of considerable importance that major non-Nato allies like Pakistan, as well as major developing countries such as China, Brazil and Russia abstained from the vote. In publicly released statements, officials from these countries have made clear their apprehensions on some of the points of the resolution. As a traditional non-aligned, pro-Iran country, India had all the reasons to follow their lead. However, in a brave departure from an erstwhile moribund policy, India has declared that by its own independent inquiry, it feels that Iran needs to do more in order to comply with the IAEA’s regulations.

In any case, siding with the US gives a boost to the recently signed nuclear deal, and might facilitate Indo-US cooperation in the energy field. The leftists in India are naturally unhappy about this. But the fact is that Manmohan Singh’s India has finally accepted that it has more to gain by siding with the US than by being against it.

October 2005

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