No.s 39 & 40, June 2005

No.s 39 & 40
(June 2005):

Examining the Current Boom

Examining the Current Boom

At the start of 2004, the NDA government waged a high-pitch campaign to the effect that India was “shining”, that is, prospering. Assorted figures were paraded and distorted to claim that the economy was performing miraculously well as a result of the economic “reforms”. This was claimed even as in the very period of liberalisation unemployment and hunger had grown (see Aspects no.s 36 & 37).

The theory that the country was prospering met a brief setback during the May 2004 elections, when the electorate, which knows from its own experience the real performance of the economy, unambiguously voted against those who had been at the forefront of implementing the “reforms”. However, the new entrants, the UPA government, lost little time in reviving the NDA’s claims: indeed, the official Economic Surveys of 2003-04 and 2004-05, by lauding the condition of the economy, amount to endorsements of the preceding government which the UPA replaced in office.

Is the economy on a higher “growth path”?
In particular, the new government claims that the current upturn in the economy is not merely a transient boom which will turn into a slump after it exhausts its momentum; rather that it is a sign of a permanent change, a higher growth path: 

... the growth performance of the Indian economy during 2003-04 and 2004-05 indicates a possible ratcheting up of the trend rate of growth of the economy, from around six per cent to about seven per cent per year... While a business-cycle type of explanation of the performance of the economy in the two years 2003-04 and 2004-05 is also tenable, a trend acceleration may be underway... –Economic Survey, 2004-05

While the phrasing of this claim is cautious (“possible”, “may be”), no such caution is displayed by the media, which retail endless stories of the Indian economy’s “take-off”. The media can hardly be blamed, since such notions are being propagated at the highest levels. Delivering the Jawaharlal Nehru Memorial Lecture in London, Montek Singh Ahluwalia, long the most aggressive proponent of 'globalisation', claimed that India’s growth rate would accelerate to eight per cent in the near future and that by 2040 India would become the world’s third largest economy, after the US and China. Such is the condition of the Planning Commission that Ahluwalia, the deputy chairman of that body, cited as his authority an American financial firm, Goldman Sachs.

No doubt there has been higher growth during the last two years than in the previous few years. But what is the basis for the claim of a hike in the trend rate of growth? Three arguments are cited in the Survey. (i) First, that despite having achieved high GDP growth of 8.5 per cent in 2003-04, the economy is estimated to have grown another 6.9 or 7 per cent in 2004-05. (Official bodies are also projecting a similar growth rate for 2005-06.) (ii) Secondly, that the growth rates of capital goods and consumer durables have been in the double digits since September 2003 (except in certain months). (iii) Third, that the economy’s rates of savings (that is, how much of the GDP is not consumed, but saved, in either financial or physical form) and investment (investment as a percentage of the GDP) have increased sharply. This last would obviously be important if true, since future growth depends to a large extent on how much is saved and invested today.

As for the first argument, it is hasty to discern a trend on the basis of two or three years’ data. The late 1980s and the mid-1990s saw similar patches of relatively high GDP growth, which gave way to low growth thereafter. Instead, if we take not the last two years but the last five years, we get an average GDP growth rate of around six per cent – no different from the 1980s or 1990s.

Secondly, capital goods (i.e., investment goods) production generally grows rapidly during the upswing of a business cycle, when businesses expand activity, and drops equally sharply during the downswing. Consumer durables – largely luxury items – have in the past boomed briefly, only to collapse thereafter as demand gets exhausted. At any rate, since consumer durables account for only 5.4 per cent of the Index of Industrial Production, they cannot be a base for sustained industrial expansion.

Thirdly, a recent study has shown that the Government claims of a hike in the savings rate  and the investment rate are based on a wrong methodology, disregarding the recommendation of an official report on the subject and an earlier official decision. Correcting for this, the actual savings rate in 2003-04 was not 28.1 per cent but 24.8 per cent. Even the whole of this saving was not absorbed in the economy (1.8 per cent flowed abroad instead), so that the investment rate came to just 23 per cent – not 26.3 per cent as is claimed. (S.L. Shetty, “Saving and Investment Estimates: Time to Take a Fresh Look”, Economic and Political Weekly, 12/2/05) By contrast, the investment rate in the last pre-“reform” year (1990-91) was 24.1 per cent.

Present boom compared to the mid-nineties boom
This is not the first time we have been told that the economy is on a higher growth path thanks to the “reforms”. The years 1994-95 and 1995-96 saw an industrial boom, which the Government seized on as evidence of the success of their policies:

1995-96 witnessed a very satisfactory growth rate in GDP of 7.1 per cent. The momentum of growth has been maintained in 1996-97, thus providing increasing evidence that the growth potential has improved as a result of the reforms initiated in 1991. With the passing of election distractions, the pace of economic reform was also revived.... there is a good prospect that a higher growth rate would become a permanent feature of the economy. –Economic Survey, 1996-97 (emphasis added)

With a few changes of dates and figures, these lines could well have appeared in the latest Economic Survey.

Indeed, in many ways the mid-nineties boom outdid the present boom. The investment rate in 1994-95 and 1995-96 was 23.4 per cent and 26.5 per cent of GDP respectively – compared to 23 per cent for 2003-04. Within this, private corporate sector and public sector investment (i.e. excluding investment by households) were far higher in the earlier period than in 2003-04. Manufacturing too rose much more sharply in 1994-95 and 1995-96 than during the last two years.

Annual growth rate of industrial production: Mid-1990s boom and the present boom

  Mining & quarrying Manufacturing Electricity Overall
1994-95 9.8 9.1 8.5 9.1
1995-96 9.7 14.1 8.1 13
2003-04 5.2 7.4 5.1 7.0


4.8 9.0 6.4 8.4

The mid-nineties industrial boom was considerably fuelled by the post-liberalisation runaway growth of consumer durables, and the setting up of industrial capacity to produce consumer durables. Consumer durables grew at the rate of 16.2 and 25.8 per cent during 1994-95 and 1995-96, as compared to 11.6 and 15.3 per cent in 2003-04 and the first nine months of 2004-05.

The mid-nineties boom peaked in 1995-96; the following year, 1996-97, the growth rate of manufacturing halved; and for six years after that it remained in a slump. Consumer durables growth fell from 25.8 per cent in 1995-96 to 4.6 per cent in 1996-97. Investment plummeted from 26.5 per cent of GDP in 1995-96 to an average of 22.4 per cent in the following seven years.

Within this, private corporate and public sector investment fell continuously from 17.5 per cent of GDP in 1995-96 to just 10.5 per cent in 2002-03.

Private corporate and public sector investment as % of GDP

  Private corporate Public sector Combined pvt corp & pub sec
1994-95 7.1 8.7 15.8
1995-96 9.9 7.6 17.5
2003-04 5.6 5.3 10.9

The 1996-97 Economic Survey had a box item confidently titled “Slowdown of industrial growth rates in some sectors is not indicative of an industrial recession”. However, in 1997-98, the corresponding box was titled “Industrial slowdown”; in 1998-99, “Continuing industrial slowdown”; in 1999-2000, a rather optimistic “Signs of sustained industrial recovery”; only to be followed in 2001-02 with “Widespread industrial slowdown”.

If the present upturn follows the pattern of the mid-nineties boom, the current manufactured euphoria will be short-lived.

However, let us assume that the current boom continues for some time. The question is, what type of growth is taking place?

Luxury consumption leads the boom
No doubt the production of capital goods has grown sharply in the last two years. The imports of capital goods too have grown sharply. These are signs of a pick-up in investment. However, it is striking that, during April 2004-January 2005 (the latest figures available) the increase in imports of capital goods accounts for only 14 per cent of the increase in non-oil imports. Total non-oil imports have grown faster than capital goods imports. Indeed, the increase in gold and silver imports is sharper, and larger in absolute terms($3.4 billion), than the increase in capital goods imports ($2.4 billion). Electronics imports have grown almost as fast. Both gold imports and electronics imports are comparable in size to capital goods imports (during April 2004-January 2005, capital goods imports, gold imports and electronics imports were $9.8 billion, $8.8 billion, and $7.9 billion, respectively). Luxury consumption is outpacing investment. 

Credit to medium and big industries has no doubt picked up sharply, growing 10.3 per cent in the first seven months of 2004-05 (up from 5.1 per cent in 2003-04). However, it pales in comparison with the growth of credit to speculation and consumption. The Survey admits: “Credit to real estate and housing sectors were the driving force in the expansion of non-food credit during 2004-05 up to October 2004. Credit to real estate increased by 47.7 per cent in the current year (up to October 2004) and that to housing increased by 30.9 per cent... . ”

Medium and large industry have sources of finance other than banks (including borrowing abroad). The situation of the innumerable small scale industrial units, of course, is far worse. Even the Survey is compelled to note that “The decline in the share of the small scale industry sector in total Net Bank Credit has been a matter of grave concern. For public sector banks, the share of small scale industry advances in total net bank credit has declined continuously... .”

Increasingly distorted pattern of growth
Moreover, the pattern of industrial production has changed considerably over the last two decades away from basic goods (items required for productive activity, such as basic chemicals, fertilisers, petroleum products, coal, cement, iron and steel, and electricity), capital goods (items of investment, which increase productive capacity), and wage goods (items of mass consumption such as soap, detergents, textiles, footwear, matches, pencils, tea and edible oil), and towards items that, in the Indian context, are luxury items, such as telephones, televisions, passenger cars, motor cycles, air conditioners, and refrigerators (these make up the bulk of the category “consumer durables”). The process of distortion of the industrial structure began a long time ago: When the new series of the Index of Industrial Production (IIP) was constructed with 1993-94 as the base year, instead of 1980-81, the weight given to the consumer durables industry had to be doubled, while that of basic goods and capital goods went down. That is, consumer durables production is a much larger share of industry now than in the past.

That trend has accelerated. In the period 1993-94 to 2003-04, production of basic goods  grew at the compound annual rate of 5.4 per cent, capital goods at 7.2 per cent, and consumer non-durables (a category composed largely of wage goods, but also including some luxury items such as beer, soft drinks, ready-made foods and cigarettes) 6.4 per cent. Whereas consumer durables grew at the compound annual rate of 10.2 per cent over the same period.

Growth rate of index of industrial production 1993-94 to 2003-04
(use-based classification; compound annual rate of growth)

Basic goods 5.4%
Capital goods 7.2%
Intermediate goods 7.1%
Consumer durables 10.2%
Consumer non-durables 6.4%

–Handbook of Statistics on the Indian Economy 2003-04, RBI

The automobile industry in particular has seen spectacular growth, which the Economic Survey parades as an example of the strength of the industrial growth:

The high growth observed since 2001-02 in automobile production continued in the first three quarters of the current year. Annual growth was 16 per cent in April-December, 2004; the growth rate in 2003-04 was 15.1 per cent. Consequent to liberalisation, the arrival of new and contemporary models, easy availability of finance at relatively low rate of interest and price discounts offered by the dealers and manufacturers appear to have stimulated the demand for vehicles and a strong growth of the industry. The automobile industry grew at a compound annual growth rate of 22 per cent between 1992 and 1997. With investment exceeding Rs 50,000 crore (Rs 500 billion), the turnover of the automobile industry exceeded Rs 59,518 crore (Rs 595.18 billion) in 2002-03. Including turnover of the auto-component sector, the automotive industry’s turnover, which was above Rs 84,000 crore (Rs 840 billion) in 2002-03, is estimated to have exceeded Rs 1,00,000 crore (Rs one trillion) in 2003-04. – Economic Survey, 2004-05

The contrast between consumption and investment can also be seen here: while production of passenger cars in 2003-04 was more than double the figure for 1996-97, production of commercial vehicles (trucks, trailers, tempos, etc) was 16 per cent lower. (No doubt, commercial vehicles have picked up in 2004-05.)

Pro-liberalisation commentators quote the surge in automobiles, mobile phones, and the like as evidence of growing prosperity. However, the numbers involved are still a tiny fraction of Indian society. About four to six per cent of the population is 'connected' (via landline or mobile phone or both); less than four per cent of the households own a car. The top 10 per cent of the Indian population, about 100 million people, can sustain demand for such commodities and services.

By contrast, the industries producing items of daily consumption – textiles, soap, footwear, and the like – have not seen any boom. The long-standing reasons for sluggish demand in the Indian economy have been accentuated under liberalisation – since the proportion of landless and marginal farmers has grown; other rural semi-feudal extractions such as usury have flourished; agricultural output growth has slowed and agricultural employment growth has stalled; and industrial employment growth has slowed to a crawl. As a result the vast majority of the population are out of the market. No doubt, national income continues to grow, but that merely reflects growing inequality.

This is not to suggest that the current growth is simply the outcome of elite consumption. Other things such as increased exports and some Government projects (such as the National Highway) have also fuelled demand. There is a general expectation that the economy will continue to improve, and the media do their best to sustain this expectation. However, it is worth keeping in mind that during the period of stagnation before the boom, capacity utilisation in manufacturing had sunk very low (one measure used by the RBI’s Report on Currency and Finance 2000-01, put it at 75.7 per cent). Some of this capacity had been put up during the period of the mid-1990s boom. Having burnt their fingers once on expectations of sustained growth, and not yet having exhausted existing capacity, industrialists would be in no hurry to expand capacity once again.

In short, while the long period of stagnation (1996-97 to 2002-03)  has been followed by a rapid pick-up in industrial growth over the last two years, we need to note three things: first, that the present boom does not by itself signify a higher growth path; secondly, that it is not based on an expansion of the entire market, but is led by the consumption of the upper sections; and thirdly that, as a result, there is not all-round industrial development. Rather, the structure of industry is even more distorted.


NEXT: Budget 2005-06: Seeing through the Propaganda


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