special article
India’s Recent Economic Growth: A Closer Look
R Nagaraj
The Indian economy turned around after 2002-03,
clocking a growth rate of 8.7 per cent per annum, based
on an industrial recovery, a sustained growth in services
(especially communications and business services), and
growing exports during a boom in world trade.
However, the poor and deteriorating quality of statistics
seem to question the extent of the upswing. But the fact
that growth has been underpinned by an
unprecedented rise in the fixed investment to gdp ratio
cannot be denied. For the first time, consumer credit in a
low interest rate regime has boosted the demand
(sweetened by fiscal concessions) for consumer durables
and housing. However, the deceleration in agriculture
(particularly foodgrains) and a decline in the share of
fixed investment in infrastructure and industry cast
doubt prima facie on the optimism about the future.
I
n the four years ending 2006-07, India’s domestic output
grew annually at 8.7 per cent, making it the world’s second
fastest growing economy after China. This includes an 8.8
per cent annual growth rate of manufacturing during the five
years between 2002-03 and 2006-07, and a sustained growth
in services at 9 per cent annually during the six years since
2001-02 (Figure 1, p 56).1 The high growth rate is accompanied
by stable prices and a modest current account deficit in spite of
spiralling crude oil prices. These accomplishments are sure
signs of a buoyant economy – at least in the aggregate in the
medium term.
In the popular perception, the private corporate sector is the
engine of growth (supplemented by foreign capital inflows),
facilitated by the added momentum to infrastructure investment
using the instrument of public-private partnership (PPP). Apparently, after many false starts, by trial and error, the policymakers
seem to have arrived at the judicious mix of industries, institutions and instruments to propel the economy on to a higher
growth path – just as China was able to do so about two decades
ago. Such optimism is a welcome change from the gloomy scenario
at the turn of the millennium, when domestic manufacturers
faced the threat of Chinese imports, and the burst of the dotcom
bubble portended the end of the software boom.
How credible is the foregoing “growth story”, in terms of the
economic statistics supporting it? How sound are the underlying
Table 1: Industrial Growth by Use-Based Industry Groups, 1992-93 to 2006-07
(Average of annual growth rates in %)
Years
IIP General
IIP
Use-based Industry Groups
Mfg
Basic
Capital Intermediate
Consumer
Total
Durables Non-
durables
1992-96
6.2
6.1
7.8
0.3
8.0
4.2
7.3
3.7
1997-02
5.2
5.6
3.9
5.9
6.2
5.6
9.7
4.3
2003-07
8.1
8.8
6.5
14.3
6.1
9.6
8.8
10.4
1992-07
6.4
6.8
5.9
6.8
6.7
6.4
8.7
6.0
Source: CSO web site.
I am grateful to the officials in the Central Statistical Organisation and
the Reserve Bank of India who spared their valuable time to discuss
methodological details in estimating services sector output. However,
I am alone responsible for the interpretation reported in this paper.
Following the usual disclaimers, I am indebted to the journal’s referee
and Atul Kohli for their comments and suggestions on an earlier version
of the paper.
R Nagaraj ([email protected]) is with the Indira Gandhi Institute of
Development Research, Mumbai.
Economic & Political Weekly EPW april 12, 2008
real factors or the “the economic fundamentals”? To find out, this
paper examines industrial performance since 2002-03, and the
services sector over a longer period at a disaggregated level using
the official statistics, subjecting them to critical scrutiny. The
widely held views are reassessed to offer a nuanced yet firmer
picture of the recent economic performance.
1 Industrial and Services Growth
Based on the index of industrial production, Table 1 and Table 2
(p 56) describe the average annual growth rates of industrial
output over five-year intervals since 1990-91 – by use-based classification, and by two-digit industry groups respectively. There has
Economic and Political Weekly, Vol. 43, No. 15, April 12, 2008, pp 55-61
55
speciAl article
indeed been a turnaround since 2002-03, ending the period of (ii) business services that have witnessed most dramatic indeceleration that lasted for seven years since 1995-96. The an- creases: from 8 per cent to 18.8 per cent and from 13 per cent to
nual average growth rate in manufacturing between 2002-03 and 23.3 per cent respectively. The rapid growth in these two services
2006-07 is 8.8 per cent, up from 5.6 per cent during the previous Figure 1: Economic Growth, 1991-07 (in %)
five years. The improvement is widespread across the use-based 20
industries, as also across all two-digit industry groups. Capital
Manufacturing
15
goods have led the recovery with an annual average growth rate
Services
10
GDPfc
of 14.3 per cent – in sharp contrast to near zero growth between
5
1992-93 and 1995-96 when these industries were faced with a
sudden and sharp decline in tariffs. In terms of use-based indus0
1991
1993
1995
1997
1999
2001
2003
2005
2007
try groups, the capital goods recovery is led by transport equip-5
ment, in other words, the automotive industry.
Since the early 1990s, services have emerged as the economy’s has increased their combined share in services output from 3.4
“leading sector”, increasing their share in domestic output from per cent in 1991-92 to 14.6 per cent in 2005-06 – representing
42 per cent in 1991-92 to 54.7 per cent in 2006-07. The recent one-fifth of the incremental output in the services sector. Another
aspect of services growth in the recent
surge represents a continuation of the Table 2: Industrial Growth by Two-Digit Industry Groups
years is that it has occurred in the priacceleration, except for a brief dip in (1992-93 to 2006-07, average of annual growth rates in %)
NIC
Industry Group
1992-96 1997-02 2003-07 1992-07
vate corporate sector, unlike most serv2001-02. While theories abound to ex20-21 Food
4.6
2.7
4.1
3.8
ices growth that is in the unorganised
plain the foregoing trend, efforts to un- 22 Beverages
9.2
11.6
14.8 11.9
sector [Shetty 2007].
derstand the underlying growth at a 23 Cotton textiles
6.8
2.4
5.0
4.6
In short, while industry revived after
dis­aggregated level have been limited, 24 Silk, wool textiles
10.7
9.0
4.2
8.1
2002-03, and services sustained their
which seems particularly serious since 25 Jute
1.3
-0.2
-1.5
-0.1
0.6
3.8
11.7
5.3
growth in the current decade, it is capiservices form such a diverse collection 26 Textile products
27
Wood
5.0
-4.3
0.8
0.2
tal goods, communications and busiof economic activities with varying
7.4
5.4
8.2
6.9
nesses that are at the forefront of the
sources of stimuli, technologies, market 28 Paper
29
Leather
1.2
8.3
-0.9
3.2
recent surge in domestic output.
conditions and forms of organisation.
30
Rubber
3.4
6.7
5.9
5.4
As a first step, we compare the trend
31
Chemicals
6.6
8.0
9.0
7.8
2 Reliability of Estimates
growth rates in services sector value
32
Non-metallic minerals
8.9
9.0
6.8
8.3
Some aspects of the reliability of output
added during the 1980s and thereafter,
33
Basic metals
13.6
3.0
12.5
9.3
estimates are discussed in this section.
at a disaggregated level, using the 34 Metal products
-2.2
6.4
5.2
3.3
National Accounts Statistics (NAS). The 35-36 Electrical and non-elec m/c 3.0
6.4
12.7
7.3
2.1 Industrial Statistics
data shows that the acceleration is 37 Transport equipment
8.0
7.6
12.7
9.3
Until 2000-01, value added in registered
mainly on account of the following sub- 38 Other mfg
3.5
4.8
11.8
6.6
6.1
5.6
8.8
6.8
manufacturing that accounts for about
sectors constituting about one-third of 2-3 Manufacturing
two-thirds of total manufacturing was
domestic output, and a little less than Source: Economic Survey, various issues.
estimated using factory level data
two-thirds of services sector output Table 3: Growth Rates of Services at a Disaggregated Level,
1980-81 to 2005-06 (in % per year)
collected
under the Annual Survey of
(Figure 2, p 57):
Service
Trend Growth Rates during
Industries (ASI). Unregistered sector
(1) Trade, hotel and restaurants
1981-05 1981-91 1992-06
1 Road transport
7.6
6.9
8.3
value added was obtained by the “in­
(2) Transport other than railways
2
Water
transport
10.3
4.7
9.5
direct method”, that is, as a product of
(3) Communications
(-) 0.7
5.8
2.2
value added per worker (based on sam(4) Personal, social and community 3 Air transport
4 Services incidental to transport
7.8
9.5
6.7
ple survey estimates) and the number of
services.
5 Postal services
(-) 0.1
3.9 (-) 3.7
workers in each industry (from the NSS
Among these, it is communications
6 Telephone service
14.2
8.0
18.8
surveys or the population census). While
that has witnessed the largest increase
7 Miscellaneous communication services 6.6 (-) 13.7
27.8
there were always concerns about the
in its growth rate, which jumped from 8 Overseas communication services
19.2
17.4
18.2
unreliability of the unregistered sector
5.8 per cent per year in the decade of 9 Business services
17.1
13.0
23.3
estimates, the ASI data were considered
the 1980s, to 20.4 per cent per year 10 Community services
7.8
7.1
8.9
relatively satisfactory. But, this longbetween 1992-93 and 2006-07.
10.1 Education
7.7
7.1
8.8
held practice was abandoned as the ASI
As the foregoing categories of serv- 10.2 Medical and health
8.2
8.0
9.4
2.6
3.0
1.9
estimates were found to have become
ices seem too aggregated to give a 11 Recreation and entertainment
(-) 0.9
9.3 (-) 17.5
unreliable, substituted by the Index of
clearer picture, we now report a further 12 Radio and television
13
Personal
services
4.7
2.9
6.6
Industrial Production (IIP).
dis­aggregation, also using the NAS, in
6.2
5.4
6.7
As is widely known, the IIP is the leadTable 3. While a variety of services re- 13.1 Tailoring
13.2 Sanitary services
5.7
7.0
4.9
ing short-term indicator of value of outported higher growth rates between
13.3 International and extra
put based on physical indicators of pro1992-93 and 2006-07, compared to the territorial services
(-) 0.4
3.1
2.7
duction. It is designed to provide output
1980s, it is (i) telephone services and Source: National Accounts Statistics, various issues.
56
april 12, 2008 EPW Economic & Political Weekly
special article
sectors that have boomed recently (as discerned in the previous
section).
2.2.1 Communications
25
20
15
5
10
0
Without doubt, of late, new private cor­porate firms have displaced
the public sector monopolies in providing telephone services. CSO
has responded to this develop- Figure 2: Growth in Services, 1981-2007
ment by using number of sub- (in % per year) 0 5 10 15 20 25
scribers to compute the value
5.9
added in this service, supple- Services
8.4
menting its usual procedure. Its
6.5
Sources and Methods states:
Trade
1981-91
1992-07
8.2
The estimates of value added
from…communications in [the]
public sector are based on up-todate and reliable information. For
the private sector, the estimates
are compiled mostly through indirect methods using proxy indicators, such as number of telephone connections or extrapolating with inter-survey growth
rates in [the] workforce [CSO
2007: 161] (emphasis added).
Hotel and restorant
4.4
10.3
Other transport
6.8
8.1
Services
estimates at one-digit levels, namely, mining, manufacturing and
electricity.2 Evidence on the reliability and accuracy of the IIP suggests the following: (1) As the year move away from the base year,
trends in production diverge between the IIP and the ASI, (2) At
the two-digit level of industrial classification, IIP is not a good
predictor of production trends as found in the ASI.
How is the index computed? It is based on the monthly production data voluntarily supplied by factories and firms. Though the
grant of a licence for production mandated the supply of
monthly production statistics to the official agency, the rule was
never applied in practice. As firms have no in­centive (or penalty)
for submitting the information, especially in the liberal policy regime, the primary information for computing the IIP has weakened in recent decades [Kulashreshtha and Kolli 1995]. When
fresh data are not forthcoming, the official agency simply repeats
the past information.3 Thus the IIP has widely known to have become an unreliable barometer of industrial output.4
In the days of industrial licensing, it was found that the IIP underestimated industrial production compared to the ASI. But with
the dramatic fall in the submission of the monthly production
data to compute the index, in recent times, there is little basis to
believe that the same pattern holds any longer. Thus, the substitution of the ASI with the IIP has meant a serious dent in the reliability of the official estimates of industrial output, especially at
the disaggregated level (two and three digit of NIC). This view is
fully endorsed by the recently released official National Accounts
Statistics: Sources and Methods. To quote:
Communication
Other services
7
21.5
5.4
7.2
1981-91 1992-07
Apparently private cellular
phone operators have been overstating their subscriber base in
order to secure a larger share of the “spectrum” – the radio spectrum frequencies that carry mobile phone signals. A priori, such a
practice seems eminently plausible as the private firms have their
…ASI data since the 2000-01 onwards could not be used as the growth
rates for the years 2000-01 and 2001-02 are not in line with the
incentives to do so, perhaps quite similar to what used to happen
growth rates indicated by the index of industrial production, excise
in the erstwhile licensing regime when firms routinely overstated
revenue collections or the corporate sector (manufacturing segment)
their capacity utilisation to corner industrial licences and prevent
data. It was, therefore, decided…to use the IIP data at a detailed
entry of new firms.
level, for compiling the estimates of value of output and value added
Such plausibility is brought to light in the ongoing dispute befor subsequent years, till there is convergence between the IIP based
GVA [gross value added] estimates and the ASI based GVA estimates
tween Tata Teleservices (representing CDMA technology) and the
[CSO 2007: 126].
association of GSM service providers,
Commenting on the quality and limita- Table 4: Sector-wise Shares in Fixed Investment in Total GFCF when the latter has been accused by the
(at 1999-2000 Prices, average of years, %)
tion of the data, the official document
former of hoarding the spectrum by inIndustry/sector
1992-96 1997-01 2002-06
further said:
flating the number of sub­scribers.6 If the
1 Agriculture and allied 9.4
8.6
9.0
charge is correct, then prima facie there
5.0
2.2
1.9
Limitations of IIP are well documented, 2 Mining most important being the old base years, 3 Manufacturing
is overestimation of value added in com29.3
37.0
30.7
non-response, coverage of new units and 3.1 Registered manufacturing
21.7
27.7
21.4
munications, a reason to suspect the ofnew products [CSO 2007: 127].
3.2 Unregistered manufacturing
7.7
9.3
9.3
ficial estimates of growth. Further, it is
4 Electricity, gas and water
12.6
9.0
7.1
widely acknow­ledged that the revenue
5 Construction
1.0
1.7
2.6
2.2 Services Sector Database
per telephone subscriber line (be it land
6 Trade, hotel and restaurants
3.2
2.8
3.1
Data on services output, outside of publine or cellular) has come down, expect7 Transport, communications
11.9
11.7
11.6
lic sector, are obtained by the indirect
edly, with the growth in the number of
7.1 Railways
2.4
1.4
1.4
method mentioned earlier, namely, as a 7.2 Other transport
subscriptions, which could further erode
6.2
6.7
7.5
product of (dated) parameters of value 7.3 Communications
the value added in this service.
3.3
3.6
2.6
added per worker of various services 8 Banking and financial services;
13.3
15.1
16.0
2.2.2 Business Services
activities and their employment esti- real estate and business services
8.1 Banking and insurance
2.8
2.1
1.0
As is widely known, this service mainly
mates. The official economic statisti8.2 Real estate and business services
10.5
13.0
15.1
consists of exported information techno­
cians seem so unsure of the magnitudes
9 Community, social and public services 13.6
11.9
14.1
logy (IT) and IT enabled services (ITES),
and reliability of these estimates that
9.1 Public administration and defence
10.6
7.9
8.4
whose
value is reported in foreign exthey are not even in a position to gauge 9.2 Other services
3.0
4.0
5.7
change, as they are almost entirely exportthe direction of bias in them.5 We will 10 Total
22.7
24.6
27.7
delve on the problems relating to the two Source: National Accounts Statistics (NAS), back series; NAS 2007.
oriented activities. As there is no official
Economic & Political Weekly EPW april 12, 2008
57
speciAl article
expected to contribute to fixed capital formation is not rising. A
closer look at the FDI inflows suggests that on an average about
29 per cent of the inflow between 2004 and 2007 went to acquire
existing equity capital, which does not represent net addition to
the economy’s capital stock; in other words, it went to acquire
managerial control in domestic companies.8 Further, on average,
about 22 per cent of the FDI in the same period represented “reinvested earnings”, which does not represent fresh capital inflow.9
Therefore, on closer scrutiny, foreign capital’s contribution to additions to the fixed capital stock is modest; most of the growth in
fixed investment is financed using domestic resources.
By type of investment, much of the increment has occurred in
construction (as against machinery and equipment) as its share
in GFCF has turned around in the late 1990s to surpass 50 per cent
mark – and to exceed the level it recorded in 1980-81 (Figure 5).
History suggests that with modern economic growth the share of
construction goes down as that of machinery and equipment
rises. India too broadly followed this pattern, but what we are
witnessing lately is a mild reversal of the trend.
By industry of use, the increased fixed investment has gone
into real estate and construction, as shares in total GFCF has gone
up from 10.5 per cent and 1 per cent respectively during 1992-96
to 15.1 per cent and 2.6 per cent during 2002-06. The other booming
Figure 3: Investment Ratios (in%)
40
20
58
1990
1992
1994
1996
1998
2000
2002
2004
2006 2007
Figure 4: Foreign Capital Inflow
30
120
25
Total foreign investment inflow
(left hand side)
FDI’s share in total
(right hand side)
20
Billion US $
Notwithstanding the foregoing statistical disputation, there are
reasons to believe a genuine and substantial expansion of domestic output in recent years. India’s fixed investment rate – gross
fixed capital formation (GFCF) as a ratio of domestic output – has
gone up by 7 percentage points in five years to reach 33 per cent
in 2006-07 – up from around 25 per cent in the second half of the
1990s (Figure 3). It represents the largest increase in the investment
rate India ever witnessed, taking it close to those attained by the
east Asian economies in their phase of rapid economic growth.
This does not include 1.2 percentage points of the domestic
output “invested” by purchasing mostly gold by resident Indians,
which in recent years get recoded as investment as per the
guidelines of the 1994 UN System of National Accounts.
Discounting for “investments” in gold, the gross capital formation has risen from 22.8 per cent of GDP at current prices in
2001-02 to 35.9 per cent in 2006-07. Is this increase in the investment rate on account of the boom in foreign capital inflow? No,
the rise in the investment rate is almost entirely financed by domestic resources as there is a corresponding rise in the gross domestic saving rate, from 23.7 per cent of GDP at current prices to
34.8 per cent during the same period; foreign investment accounts for 1.1 per cent of domestic output.
As is widely known, inflow of foreign private capital has
boomed in the current decade, especially since 2004 (Figure 4).
But the share of foreign direct investment (FDI), which in principle is
GFCF/GDPfc
10
0
3 Understanding Recent Growth
GCF/GDPfc
30
100
80
15
60
10
40
5
20
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
Per Cent
monitoring or regulatory agency for this sector, government does
not have an independent access to information. Therefore, it depends on NASSCOM, the industry association, which supplies data
on the foreign exchange earnings of these services that the RBI
uses for estimating the balance of payments and the CSO for computing the national accounts. No firm, region, or item-wise break
up is reportedly provided that would permit cross verification of
the aggregate numbers. In attempting to do so, using the estimates of the WTO and the US official statistics, Chandrasekhar
and Ghosh (2008) have offered a basis to suggest overestimation
by NASSCOM, the plausible reason being the double counting of
earnings of software professionals both as software exports as well
as remittances.
Value added in this sector is arrived at by subtracting the rupee
value of intermediate inputs from the value of the exports. Since
these services are mostly labour intensive, with limited imported
intermediate inputs, value added per worker shows the dollar
value of the labour services. This explains why the phenomenal
growth in the value added in these services has not led to a
corresponding rise in employment. In other words, if these
services were to be values at domestic prices, then the growth
rates would probably get reduced to one-fourth or one-fifth of the
reported numbers.
Thus, the foregoing discussion indicates the infirmities in the
estimation of output of precisely those sectors that have witnessed rapid growth recently.7 However, this is not to dismiss the
recent upsurge in output growth, but to suggest a re-examination
of the quantitative bases for assessing the growth in these
industries and services.
0
Figure 5: Share of Construction in GFCF (in %)
80
60
40
20
0
1951
1957
1963
1969
1975
1981
1987
1993
1999
2005
sectors are transport (excluding railways), and community, social and public services (other than public administration and
defence) (Table 4, p 57). Not unexpectedly, much of the construction is in the private sector as the public sector’s share in total
GFCF has dwindled (Figure 6, p 59).
The boom in private housing since the late 1990s spurred by
income tax concessions to individuals in a low interest rate regime, together with the massive road building project – the
Golden Quadri­lateral Programme connecting the four metros
april 12, 2008 EPW Economic & Political Weekly
special article
that started in 2000 – seem to account for the growth in conHowever, agriculture (especially foodgrains), which still acstruction. These measures were precisely intended to revive the counts for one-fifth of domestic output and a little over one-half
sagging economy. Though officially the project is now more or of the workforce, and is widely acknowledged as a source of inless complete (with considerable time Figure 6: Share of Public Sector and Construction in GFCF (in %)
dustrial demand, has decelerated over a
and cost overruns), it is followed up by 80
longer period, especially foodgrains
Construction’s share in public sector GFCF
the north-south and east-west corridor 60
(Figure 10, p 60).11 Though electricity
generation capacity has improved
projects diagonally interconnecting the
40
somewhat after 2003, it is still at the
four metros.10 Though these invest20
ments have only marginally added to
low levels recorded in the early 1990s
Public sector’s share in GFCF
0
the net road length, they have widened
(Figure 11, p 60).
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
the highways, improved their quality
While industrial demand conditions
and expanded the carrying capacity of Figure 7: Commercial Vehicles Output (in 000s)
turned favourable for the foregoing
the existing road network. Interestingly, 600
reasons, private corporate profitability
despite the huge public invest­ment in 400
also improved perceptibly in the curthe road projects, the public sector’s 200
rent decade (Figure 12, p 60). What exshare in construction has come down,
plains this improvement? Subject to
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
suggesting that other public works proverification, it could be the outcome of
grammes have shrunk.
restructuring of production – retrenchFigure 8: Distribution of Long-Term Loans by Commercial Banks
Expectedly, better roads have “crowd- (in %)
ments and layoffs, closures and reloca60
60
ed-in” private investment in trucks, es- 50
tions, selling off unprofitable busi40
pecially of multi axel higher payload 40
nesses, amalgamations and mergers –
30
vehicles that reduce freight cost per 2020 2000 2006
that took place during the seven-year
10
tonne-kilometre (Figure 7). Better roads 00
period of deceleration since the midAgriculture
Industry
Personal
Others
Ag.
Industry
Personal
Others
have also boosted the demand for pri1990s, helping industry to regain its
Major user groups
vate transport, lubricated by easy access
competitive strength to face the
to “vehicle loans” at low interest rates, increasing capital goods changed policy environment.
output and fixed investment in non-rail transport sector.
Apparently, with the success of domestic enterprises in softSo, the proximate causes of the indus­trial turnaround are get- ware exports, many lines of manufacturing rediscovered their
ting clearer. Surely, the boom in construction and real estate international competitiveness (and self-confidence) to look to excould boost demand for a sizeable cross section of manufacturing ternal markets so as to reduce their dependence on domestic deindustries. Additionally, growth in merchandise exports that mand. Realising the need for market access in increasingly reclocked 48 per cent per year since 2002-03 could be an added gionalised global trading arrangements and to upgrade technolcontributor [Veeramani 2007], which is consistent with the long- ogy, many large domestic firms have started acquiring firms and
term pattern of Indian exports being pro-cyclical; the turnaround factories in the developed markets to secure marketing channels,
in world trade after and popular brand names [Nagaraj 2006].
Figure 9: Distribution of Outstanding 2002 could have pulled
Personal Loans (as on March 2007)
2%
Consumer durables
up Indian exports 3.1 What Explains Services Growth?
As described earlier, communications and businesses services ac[Sinha Roy 2001].
51%
Housing
32%
Apparently, for the count for a sizeable portion of incremental output. While commuOthers
first time, consumer nications’ growth is based on domestic demand, business services
credit has played a sig- seem entirely export driven. Deregulation and technological change
nificant role in ex- in telecommunications augmented the production possibility fron3%
panding industrial de- tier. Growth in communication represents bridging the huge unEducation
mand. According to met demand for telephones, by expansion of the existing firms,
3%
Credit card
the RBI, between 2000 entry of private firms and the introduction of newer technologies.
9%
Advances against fixed deposits
and 2006, distribution Mobile communication is an innovation that has diffused worldof long-term loans increased only for consumer credit, declining wide creating a new product and giving rise to new demand.
How does one understand the software boom? While it surely
for agriculture, industry, and others (Figure 8). On a further
disaggregation, one-half of the consumer credit has gone for represents a fuller utilisation of India’s stock of technical and scihousing, and the rest would have directly or indirectly contributed entific manpower, it is also an outcome of policy choices. Until
to consumer durables’ demand (excluding education loans) 1991, India sought to simultaneously promote computer hard(Figure 9). Thus, it seems reasonable to suggest that consumer ware and software industries. Hardware prices were high becredit propelled much of the demand for consumer durables, in- cause of tariffs, and the industry’s growth was sluggish on accluding automobiles, which are counted as capital goods (in use- count of the inverted duty structure – that is, tariffs were higher
based classification of industrial production), contributing to the on intermediate inputs compared to the final products. Given the
low stock of computers, access to them was restricted though
sector’s turnaround.
Economic & Political Weekly EPW april 12, 2008
59
speciAl article
there was enormous potential of its use given the large stock of
qualified engineering and science graduates. The reforms in the
1990s slashed the tariffs on hardware across the board, without
correcting for the inverted duty structure. The result was that
India was able to utilise its low cost engineering skills to produce
software services for export, though the country lost an opportunity to create an efficient hardware industry. As a fiber optic network spread across the world, dramatically reducing the cost of
communication, the outsourcing industry was born, turning nontradable services like office work into tradable outsourcing back
office operations.
Figure 10: Trends in Agriculture Output, 1981-07 (in %)
4
3
2
1
0
GDP
All crops
Foodgrains
agriculture
Non-
foodgrains
Cereals
Rice
Wheat
1980-91
1991-2000
1991-07
Figure 11: Growth in Electricity Generating Capacity (in %)
Figure 11: Growth in Electricity Generating Capacity (in %)
14
14
12
12
10
10
88
66
44
22
00
1982
1982
1984
1984 1986
1986 1988
1988 1990
1990 1992
1992 1994
1994 1996
1996 1998
1998 2000
2000
2002
2004
2002 2004
2006
2006
Figure Profitability
12: Corporate
Profitability
1991-06 (in %)
Figure 12: Corporate
Ratios,
1991-06 (inRatios,
%)
18
16
14
12
10
8
6
4
2
0
Profit after tax to networth
Gross profit to sales
Gross profit to total net assets
1991
1993
1995
1997
1999
2001
2003
2005 2006
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Figure 13: GFCF Estimates f or Private Corporate Sector
Figure 13: GFCF Estimates for Private Corporate Sector
1010
Year ending
PerPer
cent
GDP
cent of
of GDP
88
GFCF-CSO
66
44
Variations
22
00
1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99
Source: Rajakumar (2003).
As mentioned earlier, growthYears
in non-rail transport can be explained by expansion of road and air services; growth in real esGFCF-CSO
tate is on account of the housingVariations
boom and the boom in businesses that require modern high quality office space. Growth in
“other services” represents the boom in private education and
medical services. This is also supported by a rapid rise in fixed
investment growth in these services.
3.2 Institutional Sources of Growth
The private corporate sector is widely believed to have contributed
much of the recent growth (including foreign owned firms), as
it has emerged as the largest institutional category of domestic
investment, contributing 40 per cent of gross capital formation
60
in 2006-07. This claim is suspect, for methodological reasons.
There are no estimates of domestic product originating in this
sector. The RBI’s estimates of savings and investment are obtained by “blowing up” the figures using the balance sheet data
of about 2,000 large companies from the population of registered companies.
Such a procedure was suitable when the universe of the registered companies was known (from the census of the registered
companies) and the RBI sample of companies accounted for the
majority of the sector’s paid-up capital and sales. In the past two
decades, the number of registered companies has grown manifold, with little relation to the growth in economic activity, or the
number of registered factories. As a majority of these companies
apparently do not submit their annual audited accounts to the
registrar of companies (as mandated in the law), what proportion
of the registered companies are genuinely working companies is
not known.12 This shortcoming has adversely affected the “blowing up” methodology as it yields an overestimate of savings and
investment in the private corporate sector.
One can question the official estimates by looking at the gross
value added by private corporate enterprises in the factory sector
that account for the bulk of the private corporate sector. This was
estimated in 2004-05 at a mere 8.5 per cent of GDP.13 The average
for 2001 to 2005 is about the same. Admittedly, this estimate
leaves out corporate firms operating in plantation agriculture
and in services. Even if we make a generous allowance of their
value added to be 3-4 per cent of GDP, it is hard to believe that this
sector could account for the fastest growing segment of domestic
savings and largest segment of domestic investment.
This is a serious lacuna in India’s statistical system, as the National Stati­stical Commission (2001) (chairman: C Rangarajan)
has in fact conceded:
There are more than five lakh companies registered in the Registrar of
Companies (ROCs) but the actual number of companies, which are operating, is not known. This situation seriously affects the reliability of
various estimates. An exercise conducted in March 1999 indicated that
about 47 per cent of the registered companies filed their balance sheet
for the year 1997-98 with the ROCs. RBI studies on Company Finances
are based on the annual reports and balance sheets of certain sample
companies. In the absence of a reliable population frame, the RBI is not
in a position to apply suitable sampling techniques. Further, the RBI is
also constrained by the poor response from companies and non-receipt
of annual reports directly from the ROCs. The RBI’s findings are thus
based mainly on the data of responding companies and the Fact Sheets
prepared by the DCA. The reliability of the estimates of gross savings and
investment in the private corporate sector arrived at by blowing up the
sample results available from the RBI’s studies in proportion to the coverage of the paid-up capital (PuC) of the sample companies to the PuC of
all companies has been questioned time and again (http://mospi.gov.in/
nscr/mp.htm) (Vol 2, Annex 12, Section 12.1.8).
In a careful methodological exercise, Rajakumar (2003)
showed that the actual level of GFCF in the private corporate
sector in the 1990s was roughly one-half of the official estimates
(Figure 13). It would be reasonable to infer that the actual and
the official estimates would have diverged further in the present
decade, as fresh registration continues to boom.14 Therefore, the
widely held view of the economy being led by this sector is
questionable.
april 12, 2008 EPW Economic & Political Weekly
special article
If the above diagnosis is correct, then the view that the private
corporate sector is the engine of the recent economic boom
needs a serious correction. If so, then which sector accounts for
the sharp rise in domestic savings and investment? It is the
household sector, as it happens to be the residual. To be sure,
this qualification does not question the growth of aggregate
savings and investment but the contribution of the private
corporate sector.
4 Conclusions
This paper sought to take a closer look at the statistical bases for
studying growth in the industrial and services sectors that have
boomed recently in India, and its proximate causes. As the quality
of industrial statistics has deteriorated and the methodological
bases for estimating the services sector’s growth are weak, there
can be legitimate concerns about the true extent of the economic
expansion. This is not to deny significant and rapid expansion of
economic activity that has taken place across a wide spectrum of
industries and services lately.
While industrial growth seems widespread across two-digit
industry groups and use-based categories, the services boom
since 1991-92 is dominated by communications and business
services accounting for 20 per cent of the incremental value
added in services between 1991-92 and 2006-07. While the communications boom seems largely domestic-demand led growth,
business services seem entirely export driven.
Notes
1 Unless otherwise mentioned, all economic statistics used in this paper are at constant prices.
2 For an official account, see http://mospi.nic.in/
iip_intro.htm
3 For details, see Nagaraj (1999); Singhi and Mishra
(1997).
4 The official web site (http://mospi.nic.in/iip_report.htm) clearly states:
The National Statistical Commission set up
by the government to suggest measures for
improvement in the statistical system in the
country took note of the deficiency in the quality of all-India IIP compiled by CSO and made
a number of recommendations of technical as
well as administrative nature for improving
the quality of the IIP. Some of the major recommendations of the NSC on the existing IIP are
summarised below:
(a) The base year of IIP should be revised
quinquennially;
(b)The item basket should be representative
of the indices at two-digit level;
(c) The source agencies should strengthen
their statistical set-up so as to be able to effectively monitor new units and new items;
(d)The source agencies should establish contact with the manufacturing units through
fax, e-mail, personal visits, etc;
(e) The source agencies should seek the cooperation of industrial associations, state
governments, etc, in improving the response from the manufacturing units;
(f) Inclusion of items reported by less than five
factories to be generally avoided. However,
if such items are included, source agencies
must ensure 100 per cent coverage in reporting of data by such units; and
(g)Robust estimation procedure must be
adopted by the source agencies to tackle
the problem of non-response of the manufacturing units.
Economic & Political Weekly EPW april 12, 2008
The surge in growth is associated with an unprecedented rise
of the fixed investment rate by about 7 percentage points to 33
per cent of GDP in 2006-07. It is a construction led boom in private
housing and road building, smoothened by access to credit at low
interest rates. Merchandise exports grew at 48 per cent per year,
in tune with the cyclical upswing in world trade. With deceleration in agriculture (particularly in foodgrains), and a decline in
the infrastructure and manufacturing sectors’ share in gross
fixed investment in the present decade, sustaining the high
growth rate over a longer period appears moot.
Is the private corporate sector the main engine of growth?
Probably not, as its savings and investment are overestimated
because of methodological deficiencies. Therefore, the rise in
savings and investment has occurred in the household sector.
Further, the deteriorating quality of data reporting for industry
and unreliability of estimation of value added in communications
and business services casts doubts about the real magnitudes of
their growth, though one is not in a position to hazard a guess as
to the extent of overestimation.
If the dots of scepticism expressed in this paper are con­nected,
does a picture emerge that is seriously different from the
widely held view? Probably yes. If the proximate causes that we
have suggested for the industrial turnaround are correct, then they
seem to indicate the fragility of the observed turnaround. Our scepticism somewhat muddies the picture of the recent growth significantly enough to cast doubt on the optimistic scenarios portrayed.
5 For a detailed account of the limitations of the estimation methods for the services sector, refer to
the set of papers published recently in the
Economic & Political Weekly, September 15, 2007.
6 The dispute erupted when Ratan Tata, chairman,
Tata Tele Services, accused GSM operators of
inflating their subscriber numbers. Reportedly
Yankee Group, a US based consultancy firm,
found that the number of mobile hand sets sold in
India (including the second-hand sales) to be less
than the growth of mobile connections. On this
basis, the subscriber base is claimed to be overestimated by 10-15 per cent – a view that GSM operators contest. Though we have not been able to
find evidence, there is perhaps merit in the overestimation argument.
7 An illustrative exercise, reducing communication
to 80 per cent of the actual (to adjust for overestimation of the number of cellular lines) and business
services to one-fifth (the ratio is same as between
the dollar value of GDP and PPP value of GDP) reduces GDP growth rate from 6.2 per cent to 6 per
cent and services growth from 8.2 per cent to 7.8
per cent for the period 1991-92 to 2005-06.
8 SIA news letter, December 2007, Table 1, “Statement on year-wise/route-wise FDI equity inflow”.
9 RBI’s FDI inflow data as per international practices,
reported in January 2008.
10 Annual Report, Ministry of Surface Transport,
2006-07, government of India.
11 We have avoided presenting an average of annual
growth rates over shorter time intervals, given
high yearly variability in agricultural output.
12 Here is evidence to support our contention. As of
March 2007, there were 0.7 million registered
companies; only 43 per cent of them filed their annual returns till February this year (The Hindu,
March 14, 2008).
13 ASI provides data by type of organisation. We have
taken the private corporate sector to be sum of public and private limited companies. We assume that
all public sector entities are included under (i) government department enterprises, and (ii) public
corporations. If anything, our method leads to an
overestimation that only strengthens our argument.
14 The obverse of what we described for the private
corporate sector would hold for the household
sector.
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