The government is so obsessed with the GDP growth that it does not see or tend to overlook the fault lines in economic management. It is only when these basic economic frailties are dealt with India’s economy would be on an upswing in the true sense
High economic growth rate seems to have become an obsession today, especially with the two Asian economic growth competitors—India and China. They appear convinced that their global image hinges on this figure, and become nervous whenever it drops. The fact that the source of this growth, which primarily benefits just a small percentage of their population, doesn’t seem to bother them. At least in India, we see no serious planning in our economic policies to ensure its beneficial spread within the entire society. Both the governments indeed seem to be aware of its need, since their political leadership often talks of an “inclusive growth” or a “harmonious life”. So far, it has been mere lip service.
While China faces its own challenges, it seems to be doing better in this respect by being more consistent and focussed in its growth plan. India, however, is a cause for worry to some of us. According to economists, currently over 75% of the GDP (gross domestic product) growth in India largely comes from the economic growth of only 25% of its population. Regretfully, the impact of this growth has not significantly changed rural and urban poverty. It is glaringly evident as one moves around in our cities and towns where unemployment and under-employment is rising. The gains are limited to big businesses, politicians, builders, the elite and the educated middle class. One must add to this beneficiary list the corrupt amongst the government servants and politicians of all hues. Drop in growth therefore hurts these people and their riches more than the rest of the country. Business houses then start cribbing and chasing the Reserve Bank of India (RBI), demanding reduction in interest rates, while other beneficiaries complain of lack of growth and accuse the government of being comatose. The rest of the population suffers on account of inflation and rising prices, with little growth in their earnings.
A GDP growth of 6.9% growth, as a figure, is indeed not bad. The problem relates to inequitable spread of GDP, not reaching 75% majority of our people. Actually, 6.9% GDP is quite good, considering that most of the nations in the developed world today are getting closer to their economic dead end.
The real concern for many of us is the lack of responsiveness of those in power. Over 50% of India suffers from low productivity due to poor quality or lack of infrastructure. According to available data, over a third of our population has no electricity at all, and a further 40% suffer from long blackouts and wide voltage swings. This alone hugely hurts our national productivity. Year after year, we just drag along and refuse to take bold decisions to correct the direction of our growth even at the risk of temporary slowdown. No one in power seems to be worried that most of the people in the country still languish in a no-development zone. The solution, the government seems to believe, lies in giving subsidy. It is considered by those in power that this is politically rewarding. Doling out subsidies is indeed no solution. With this, we only add insult to injury by making the poor look like beggars. Instead, planners should work on schemes that would create jobs for the unskilled, poorly educated people and allow them to live with dignity. All this labour would then create wealth, in howsoever small proportions. A good portion of the economic growth should come from growth in productivity and earnings of the masses, to ensure that the government does not play a donor, a kind of benevolent philanthropist. Government programs should be designed to ensure this happens.
Agriculture and manufacturing sectors ignored
Scepticism abounds regarding our planners’ approach since, for more than a decade and half now, growth is attributed to income generated from the services sector. The two most important sectors of economy—agriculture and manufacturing—appear to be totally neglected since the last several decades. Both have been consistently performing poorly. Actually, both these neglected sectors generate real wealth by adding value in the form of skilled and manual labour. Most of the employment generation for the unskilled and less educated, happens only in these two sectors. They are known to create large scale employment as has happened in China, which created over 200 million jobs in its manufacturing sector. Jobs generated by the services sector on the other hand, are jobs for the educated and the skilled. Growth in trade and services benefits just this class. These sectors, however, do not make use of material resources, and add value by processing them. Therefore the profits in the service sector are limited to commercial monetary gains by companies involved in providing services.
The proportion of growth due to manufacturing output of the country is also grossly over- stated today. The officially stated manufacturing growth figures are highly misleading, since a very large number of manufacturing companies with reputed brand names have sharply cut down on their domestic production and are instead outsourcing their products to China and other low-cost nations. Markets are full of such products imported under Indian brand names. All such imported products get reported as India’s manufacturing output since they are sold by formerly manufacturing companies! Local value addition is merely the commercial margin, and there is no value addition by local work force. So the government GDP figures on account of manufacturing sector are over-stated whereas actually there is a sharp decline in manufacturing. Local industrial activities have almost come to a standstill and factories are closing down. As one can see, several hundred factories are now being converted into malls and residential complexes for the educated middle-class prospering on services growth in IT, hospitality, healthcare, retailing, etc.
The Indian IT and telecom sectors are growing, but almost 100% of hardware worth trillions of dollars is imported by the companies belonging to these sectors. Neither shows any willingness to invest in manufacturing at least what they need in large volumes. The cellular phone population has grown to 700 million, but not even half a percent of these are made in the country. It is however, an amazing gadget that has added tremendously to the productivity and safety of our poor people. It has improved the earnings of those in community services all over the country. But indeed, this has not happened due to any planned action by the rulers. Construction business is also flourishing. But here too, construction material is being imported in huge volumes. One, however, finds that the rapid growth in the real estate business has helped millions of artisans to earn handsomely, increasing their income manifold during the last decade. Fortunately, such field jobs cannot be outsourced. If this was possible, the Chinese would be building our apartment complexes as they do in Africa! Development of Bihar and Gujarat has taken away the labour force from our metros like Mumbai in the recent months. Today, it has created a serious labour shortage in Mumbai. Local Marathi youth consider these jobs below their dignity and prefer to work as government or municipal servants, which provide good income without working hard and putting in long hours. Carpentry work worth hundreds of crores of rupees is carried out each day in Mumbai, but not even a percent of the carpenters are Maharashtrians.
It is a sad truth that during the last decade, growth in services has not taken the country to where our economist prime minister has been promising. But there is yet another “service industry” that is making people very prosperous. One of the most profitable services today is government service, especially the jobs where government interfaces with the people. India now has hundreds of thousands of “black millionaires” amongst our government employees. Actually, some of them can indeed be listed as “black billionaires”! Unfortunately for them, they do not make it to the Forbes list of billionaires. Just recently, a government babu from Mumbai Municipal Corporation was found to have black wealth of over a billion! These corrupt men have a large spending capacity. And they do spend a lot, since it is risky to lodge such ‘earnings’ in cash. In this context, a list of gold and jewellery buyers would be interesting to look at. Yet another neo-wealthy community with foul earnings are the politicians of all hues. They are the new powerful rich class in our society. From Delhi to Gully, they are widely spread. All these men and women indirectly add a lot to our GDP growth.
There are other aspects of the recently released growth projections by the government that should make us worry. It is projected that the “agriculture, forestry and fishing” sector will record growth of just 2.5% of the GDP during 2011-12, as against the previous year’s growth rate of 7%. This will take us further away from the “inclusive development” of the country that our prime minister often whispers about. Agricultural production is indeed our manufacturing output. It creates some real wealth by using ‘free’ natural resources and a lot of human labour and personal care in ‘nursing’ the product for quality assurance. As I said earlier, those manufacturing products of a wide variety in factories and by the farmers create ‘real’ wealth by adding value using human skill and labour. Both produce essential products from raw materials with very high value addition. Wealth generated in these sectors due to sustained growth also spreads widely, since it uses in its production process a large number of unskilled labourers as well as those without formal education. Growth in these two sectors alone would therefore help us in achieving inclusive growth.
During the last 20 years, the employment generation potential of the organized sector has been waning, thereby moving jobs into the unorganized sector. Manufacturing jobs are going to the Chinese and other Asians. This in turn has led to the lack of decent jobs and other related issues. The growing unorganized sector has today become a source that is further adding to income inequalities in the country. Everywhere, a large majority of people are under-employed.
Another problem with agricultural output is that it does not register a dip just with respect to the previous year. This can happen, since the sector depends on the vagaries of the monsoon. The real issue, however, is the lack of perceptible increase in average annual growth over a long period of the last two decades. Since the 1991 reforms, the agricultural sector has been languishing. Actually, it is stuck in the 2% plus range since Independence.
In real terms, Indian manufacturing too has actually declined over this period. Just walk though the bazaars and markets to realise the huge growth in import content in all types of consumables and consumer durables. A large percentage of what our retailers offer is imported; including fruits and festival goodies. During the 1995 -2005 decade, according to the RBI report, blue-collared jobs in the organised sector in India declined! During the same decade, China created 72 million new factory jobs in their manufacturing sector, mainly for their unemployed rural youth. The problem is not the lack of enterprise amongst our people, but the complete mismanagement in handling the manufacturing sector. A researcher told me the other day that there are 65 laws that are used by the government to make manufacturing unattractive. Any manufacturer in India will tell you that managing a manufacturing enterprise can be a nightmare. After managing a manufacturing business in the high technology sector for over 50 years, I can personally vouch that government officials monitor factories primarily to collect bribes. In my case, due to my shadow power, demanding bribes was considered risky, so they just harassed my staff for sadistic pleasure.
Many who started manufacturing industries, have either opted out, or were wiped out by government servants. Those who are surviving are mostly partners in crime, albeit with reluctance or helplessness. Some very fundamental errors in handling the manufacturing sector have been committed by successive governments at the Centre. Undoing these will need a strong government. It is unlikely that we will see such a government during this decade. Just last week, the government announced developing new modern industrial zones to boost manufacturing. Will this help growth in manufacturing? Has it ever helped? Why not look at the fate of the SEZs (special economic zones) licensed by this government to business groups by acquiring land from the farmers just five years ago? Have our exports grown? Why not look at the fate of thousands of industrial estates built during the 70s and 80s and their pathetic condition today? Haven’t we learnt anything at all? This is no way of encouraging the manufacturing sector! It helps real estate guys and of course the babus and politicians involved as happened in case of SEZ fiasco.
Let us look at what kind of manufacturing industries have prospered in India. Since public health is poorly managed and pollution is on the rise, many more people fall sick today than in the past. Especially in urban India, poor sanitation and unhygeinic public places have spread ill health. Overindulgence of the greedy neo-rich has added greatly to ill health due to psudo-western lifestyle. As a result, medical practitioners, hospitals and the drug industry seem to be doing very well. The auto industry too seems to be doing well, even though soon there may be no roads to drive on! Growth of the IT and financial services sector as well as increase in the number of “black millionaires” in politics and government service has created large demand for automobiles. Since foreign automobile manufacturers find it cheaper to make auto parts and assemble autos within the country, the automobile sector too is doing well.
Prime movers in the services sector are software services, hospitality, media and entertainment services. The educated and talented poor people have benefited a great deal on this account, sharing the benefits of national economic growth. As said earlier, corruption has made hundreds of thousands of government servants and petty local politicians black millionaires. This is also a kind of service sector. They are also a part of the society that benefitted from our current economic growth. Infrastructure and housing construction industry may have given poor quality infrastructure like roads and bridges to the people of India, but the high manipulated cost of these projects has benefitted both the builders and the related government officials, making them very rich.
Some states like Gujarat and Bihar have proved that with effective planning, agricultural growth can be as high as 10% or more. Instead, the central government tends to play down this aspect of the growth scenario. It has claimed that a high GDP growth of 8%-9% will have a dynamic spread including agriculture. It fuelled hopes for a 4% or more rate of growth in this sector. Nothing of the kind happened. Agriculture as a sector is still in doldrums.
Another serious concern about agriculture arises due to its spread over different crops. Low rate of growth has been sustained all these years because, while the specific categories of crops like fruits, vegetables and oilseeds have registered relatively large growth, the production of coarse grains and pulses has grown very marginally, if at all. Therefore even the low growth figures are misleading. Look at our import statistics for agro products to know the truth.
The post-91 reform period has turned the country’s economy dynamics as is seen in the impressive GDP growth figures. So much is the hype created around it by global economists that it has helped hiding the dangerous weak links. Across the Himalayas, one sees the opposite. We continue to neglect agriculture as well as manufacturing, while China has built an admirably strong economy by focussing sharply on manufacturing exports and investments in agriculture with the use of technology and mechanisation using local skills. By neglecting these two, we have made a silent crisis that would become progressively difficult to deal with; especially with poor governance and lack of leadership. Public investment in agriculture has been in long-term decline. Agricultural research, which served India well during the Green Revolution years, has been given inadequate attention and resources. Add to this, foreign trade reforms leading to an ever-growing import bill and poor export growth, and the situation gets seemingly hopeless.
There is yet another myth. The government claims self-sufficiency in foodgrain and thereby tries to hide a food crisis that the country is experiencing. The per capita availability of food in a country, where a large section of the population is below the level of nutritional adequacy, has been low and declining. This did not appear to be much of a problem because low incomes and purchasing power among a significant section of the population kept demand in check. But with low levels of per capita availability persisting even as the indirect demand for grain on the part of the well-to-do has increased, food prices are finally turning buoyant in India, squeezing the poor even further. Farmers may not be benefiting from remunerative prices, but consumers have to pay more.
It is clear that the Indian economy is in the midst of a crisis. This crisis is different from the drop in our GDP growth. It relates to defective planning and the neglect of real wealth creating sectors like the agriculture and manufacturing. China's economic miracle, on the other hand, is solely dependent on its planned focus on these two sectors. In both these sectors today, China is experiencing vertical growth and investing in technology development and their own products. Even in the IT sector, China is far ahead of India if we take into consideration the output of the hardware and the software together. Domestic consumption of IT software in China today is 20 times higher than that in our country. It is surprising then that the central government and its economic experts are so obsessed with our GDP growth that they do not see or tend to overlook these important fault lines in economic management. It is only when these basic economic frailties are dealt with effectively, that our country’s economy would be on an upswing in the true sense.
(PS Deodhar is founder and former chairman of the Aplab Group of companies. He is also the former chairman of the Electronics Commission of the Government of India and was an advisor to late Prime Minister Rajiv Gandhi on electronics. He also was the chairman of the Broadcast Council in 1992-93 that set in motion the privatisation of the electronic media with metro channels.)
The Nifty is headed down and find its first support at 5,160 and then at 5,075. However, there will intermittent rallies. For a trend reversal, the Nifty must close above previous day’s high
The market, which was in the positive till the post-noon session, pared all its gains in late trade and ended flat. Today for the fifth successive trading day, the Nifty closed in the negative. We may see a short reversal for a day or two which may not be sustained. We continue to maintain that the weakness is trending in the market. The benchmark may find its first support at 5,160 and then at 5,075. The National Stock Exchange (NSE) saw a volume of 51.69 crore shares.
The market witnessed a strong opening as investors resorted to bargain hunting as stocks became cheaper after four days of decline. Support from its Asian peers, which were in the green in morning trade, also supported the upmove. The Nifty opened at 5,228, up 31 points, and the Sensex gained 74 points to start the day at 17,177. Healthcare, banking, power and metal stocks supported early gains.
The indices hit their intraday high in initial trade with the Nifty at 5,237 and the Sensex scaling 17,236. However, the highs enticed the investors to book profits, resulting in the benchmarks paring part of their gains.
The market continued its steady decline in subsequent trade. Selling pressure in auto, power and realty stocks in the post-noon session pushed the indices into the negative.
The market closed flat with a mixed bias following a sell-off in late trade. The Nifty settled four points down at 5,193 and the Sensex gained two points to 17,105.
The advance-decline ratio on the NSE was in favour of the decliners at 408:1012.
The broader indices outperformed the Sensex today as the BSE Mid-cap index gained 0.54% and the BSE Small-cap index climbed 0.73%.
The top sectoral indices were BSE Consumer Durables (up 1.07%); BSE Realty (up 0.83%); BSE Healthcare (up 0.32%); BSE Power (0.17%) and BSE Capital Goods (0.12%). BSE Auto (down 0.78%); BSE Oil & Gas (down 0.62%); BSE Metal (down 0.33%); BSE IT (down 0.27%) and BSE Bankex (down 0.16%) settled at the bottom of the index.
The top movers on the Sensex were Wipro (up 1.91%); Dr Reddy’s Laboratories (up 1.67%); ITC (up 1.37%); Bharti Airtel (up 1.24%) and Hindalco Industries (up 1.14%). The main laggards on the index were Jindal Steel (down 2.49%); Hero MotoCorp (down 1.41%); ICICI Bank (down 1.31%); ONGC (down 1.19%) and Tata Motors (down 0.97%).
The top two A Group gainers on the BSE were—Cadila Healthcare (up 4.74%) and Wipro (up 1.91%).
The top two A Group losers on the BSE were—Adani Enterprises (down 8.43%) and Jaypee Infratech (down 5.79%).
The top two B Group gainers on the BSE were—Nu-Tech Corporate Services (up 18.64%) and Aarya Global Shares (up 16.72%).
The top two B Group losers on the BSE were—Swelect Energy Systems (down 48.39%) and PM Telelinks (down 19.99%).
The Nifty was led by Wipro (up 2.04%); Dr Reddy’s Labs (up 1.78%); ITC (up 1.49%); Sun Pharma (up 1.20%) and Coal India (up 1.10%). The main losers on the Nifty were Reliance Infrastructure (down 3.49%); BPCL (down 3.10%); Bajaj Auto (down 2.72%); Axis Bank (down 2.38%) and BHEL (down 2%).
Markets in Asia settled in the green as investors awaited comments from US Federal Reserve chief Ben Bernanke about the economic situation in the world’s largest economy. Meanwhile, the Japanese finance ministry warned that it would intervene in the forex market, if necessary, as the yen hit a one-month high against the dollar.
The Shanghai Composite gained 0.62%; the Hang Seng jumped 1.75%; the Jakarta Composite surged 0.82%; the KLSE Composite rose 0.19%; the Nikkei 225 climbed 0.35%; the Straits Times advanced 0.54%; the KOPSI Composite was up 0.23% and the Taiwan Weighted settled 0.52% higher.
At the time of writing, the key European markets were mixed with two of the three main indices in the green and the US stock futures in the positive.
Back home, foreign institutional investors were net buyers of equities totalling Rs257.17 crore on Monday whereas domestic institutional investors were net sellers of shares aggregating Rs40.59 crore.
Aditya Birla Group company Grasim Industries is working on setting up a $500 million (Rs2,764 crore) plant in Turkey for producing VSF, a raw material used for making apparels and home textiles. The proposal is still in the planning stage with the company in the process of conducting a detailed study and obtaining various approvals. The stock declined 0.52% to close at Rs2,585 on the NSE.
SKS Microfinance today said it has raised Rs230 crore through its qualified institutional placement (QIP), which was oversubscribed on the last day of its issue, bringing in much-needed growth capital. The QIP, which was launched on 12th July received bids worth around Rs230 crore, SKS said in a statement. The stock tanked 2.38% to settle at Rs79.85 on the NSE.
Godrej Properties today said it has entered into a deal to develop a premium residential township project with a saleable area of 3.5 million sq ft on 110 acres in Panvel on the outskirts of Mumbai. The project would be on a joint venture basis with Godrej Properties entitled to a 35% share of the profit from the development. The stock fell 0.19% to Rs514.60 on the NSE.
According to the RBI governor, interest cost is only one of the several factors that have dampened growth, and the increase in policy rate by the Reserve Bank alone cannot explain the investment slow down
Mumbai: Amid widespread demand for cut in interest rate in the forthcoming monetary review to boost growth, the Reserve Bank of India (RBI) on Tuesday said the policy rate is not the only reason for slowdown in investments and the economy, reports PTI.
"The Reserve Bank maintains that interest cost is only one of the several factors that have dampened growth, and the increase in policy rate by the Reserve Bank alone cannot explain the investment slow down," RBI Governor D Subbarao said at the sixth annual Statistics Day Conference in Mumbai.
"I have asked our economic research department to do a detailed study on the time-series relationship between real interest rate and investment activity. We expect to put out that report in the public domain in the next couple of months," he added.
His comments come two weeks ahead of the quarterly monetary policy review which is due on 31st July.
Subbarao's decision to keep interest rate unchanged at the policy review last month to contain inflation evoked criticism from industry and the government.
Ahead of the policy, industry has stepped up demand for interest rate cut to boost economic growth, which fell to nine-year low of 6.5% for 2011-12.
The RBI Governor also raised issues concerning data gaps with regard to computation of inflation, national income and growth and underlined the need for rectifying them.
He also questioned the linkage between deceleration in industrial growth to 6.5% in 2011-12 and the increase in policy rates by 3.75% by RBI during March 2010 and October 2011. "... it is necessary to look behind the data and explore what lies underneath," he added.
On the current situation, the RBI Governor said, "The uncertainty surrounding economic activity has heightened in the post-crisis period. India is no exception."
He added that assessing India's potential growth rate, consistent with our objective of low and stable inflation, remains a challenge.
In its annual report for 2009-10, Subbarao said, the Reserve Bank had reported that the potential output of the Indian economy may have dropped from 8.5% pre-crisis to 8.0% post-crisis.
"Latest assessment following the standard filtering technique suggests that potential output growth may have further fallen to around 7.5%," he said.
Meanwhile, for getting a clearer picture of the price rise trend, Subbarao proposed a producers price index saying that the present structure of measuring inflation does not capture the price movement of services.
The Producer Price Index (PPI) will be better able to measure the average change over time in the sale prices of domestic goods and services, he said.
"In its present structure, the Wholesale Price Index (WPI) does not capture the price movement of services. Also, it is a hybrid of consumer and producer price quotes," he said.
Sellers' and purchasers' prices differ due to government subsidies, sales and excise taxes, and distribution costs, Subbarao said.
"For these reasons, it is, therefore, desirable that we move towards developing a Producer Price Index (PPI) that measures the average change over time in the sale prices of domestic goods and services," he added.