Economic Growth in India: A Sectoral Account

March 15, 2012

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By Deepankar Basu and Debarshi Das

 INTRODUCTION

It is of great interest to activists and policy makers alike to understand the structure and patterns of economic growth in India over the past six decades since the country gained political independence from British colonial rule. Growth of the GDP is the rate at which the total pie (of the value of goods and services) of the country expands. A high growth would mean that through a redistribution of the quickly expanding GDP it is possible to ensure that different groups of people, such as farmers, industrial workers, and the self-employed people, would experience a rise in their living standards.

But this is true for the aggregate growth rate of the economy only on average. An economy is not a homogeneous object. Different sectors of the economy grow at varying rates. For instance, the overall economy might be expanding a high rate of, let us say, 10 percent per annum, while the agriculture sector within it may be growing at a low rate of 1 percent, or may indeed be shrinking, as it has often happened in India. Hence, if the aim of government is inclusive growth, then a scenario where a high overall growth rate is accompanied by stagnation of living standards for a large section of the population, would call for at least two interventions. First, a gamut of policies that transfers income and wealth from one part of the economy to another, i.e., from the nonagricultural to the agricultural sector. Second, active government intervention to encourage movement of the workforce out of agriculture and into stable, well-paying industrial and service sector jobs. But going by the budgets of the recent past, the Indian government has been moving in precisely the opposite direction: it is implementing regressive redistribution (i.e., taking from the poor and giving to the rich) and it is reducing government sector jobs!

The first point mentioned above is not difficult to understand. Let us explain the second point in a little more detail. Output produced by different sectors can change at a relatively fast pace, but the number of people who are employed by different sectors is slow to change. It is not the case that people from a laggard sector would smoothly shift to a fast growing sector, drawn by the higher growth and incomes in the latter. This is so for several reasons.

First, migration of people from one sector to another may be hindered by a host of social and economic factors. There may be caste taboos too. The monetary and non-monetary cost of migration (social bond which one develops by living in the same village for generations, and which snaps if one migrates, for instance), individually or with the entire family, may be very high. Second, switching employment between different sectors also requires that the migrants acquire the skills which are specific to sectors they are migrating to. This again might be a tall order, especially for the poor with no access to formal education or vocational training facilities. Third, because of high degree of mechanization and automation, the fast growth sector may not demand a lot of additional people.

 Because employment levels in different sectors are slow to change, differences in the growth rates between sectors implies that over time inequality of income of people employed in different sectors would grow. For those employed in the slow growth sector, an additional burden would be the rising population pressure. The weight of a growing population, along with the low employment generation in the sector (because of output of the sector growing at a slow rate) may, in fact, reduce living standard and raise the number of poor. In short, questions of employment, poverty, inequality, migration are related to growth, both growth of the overall economy, as well as growth of different sectors within the economy. In this article, our modest aim is to examine only a few characteristic features of the Indian growth process. For the interested reader we recommend this informative article for elaboration of some of the issues we discuss here.

 Before delving into the data and analysis, let us summarise our main findings for easy reference. Our study found that the growth underway in India is extremely skewed in sectoral terms. The agricultural sector has been growing at a slow rate compared to the rest of the economy. Further, the official convention of clubbing agriculture with other economic activities such as mining & quarrying gives the wrong the impression that agricultural growth although low, is still decent. At a disaggregated level, we find that the mining & quarrying sub-sector has been booming, whereas agriculture sector per se has been growing at an even slower rate. In particular, growth in food grains production has been so low that it has been lagging behind population growth. Aside from concerns of food security, this observation raises questions over the nature of the growth currently underway in India. The impressive aggregate growth that India has been experiencing in recent decades only spells misery for those at the bottom of the wealth pyramid. Paradoxically, without attempting meaningful countervailing redistribution, the chief concerns of the establishment appears to be to push for more of the same inequitable growth. We also note that growth in the manufacturing sector has not been higher than the overall growth. Compared to the early decades after independence, growth of manufacturing has been coming down. It is the services sector activities such as finance, insurance, real estate, transportation, and banking which are pulling up the overall growth. To address the slow growth in manufacturing, the government has been mulling suspension of labour laws and environmental regulation under a new manufacturing policy. At best, this will only have a doubtful effect on the growth of manufacturing output. What is certain, though, is that such policies will redistribute more wealth and income in a regressive direction (i.e., away from the poor and towards the rich), and compound problems of environmentally unsustainable economic growth that is currently under way.

 WHAT IS GDP AT FACTOR COST?

To track economic growth of the whole Indian economy over time, economists use the notion of gross domestic product (GDP). There are different ways to compute the GDP for a country, and the statistical system in India uses “GDP at factor cost” for many sectors of the country. For the benefit of our readers, let us, therefore, briefly explain how “GDP at factor cost” is computed.

GDP is a way to measure the aggregate size of an economy over a period of time. GDP is the total market value of all the final goods and services produced in an economy over a period of time (a year, say). How is this done? For any economic activity (like the activity of a capitalist firm), economists first calculate what is referred to as value added. The value added by an economic activity over an year is the difference between two things. One, value of its output (which adds up the revenue it earns by selling its products in the market, and the change in the value of its inventories; inventories are the unsold stock of goods), and two, the cost of the non-labour inputs to production (these are called intermediate consumption, like the cost of raw materials, machinery, fuel, etc.). For each production unit, one can calculate its value added in a year by subtracting the cost of non-labour inputs from the value of its output.

 To be more concrete let us work through an example. Suppose there is farmer and a baker in an economy. The farmer produces 100 rupees worth of wheat in a year. Out of this she sells 40 rupees of wheat to consumers, and the rest (60 rupees) to the baker. The baker uses the 60 rupees of wheat to produce bread worth 100 rupees and sell to consumers. To keep the story simple let us suppose that there is no machinery involved in production; labour works alone (in the case of wheat production) or work on the input (in the case of bread production). In this case, to calculate the GDP if we simply add up value of produce of the farmer and the baker (100+100 = 200 rupees) we would commit the error of double counting. This is because 60 rupees worth of wheat is counted twice, first as the output of the farmer and second as part of the value of the baker’s bread (100 rupees). To address this problem we calculate the value added of the baker by deducting 60 rupees worth of wheat which has gone in the making of bread (which is the cost of raw materials for the baker). This is also called intermediate consumption. Thus, value added of the baker is 40 rupees. When the value added is summed over all economic activities over the period of a year in a country, we get “GDP at factor cost” for that country in that year. In our example, for instance, value added of the baker (40 rupees) is added to the value added of the farmer (100 rupees) to obtain the GDP of 140 rupees.

 To use “GDP at factor cost” over time to understand how fast an economy is really growing, we need to make one adjustment. Since the value added can increase over time because the prices of the goods being sold increase, economists typically divide the total value added, either for the whole economy or a sector thereof, by an average price level (what is called a “price index”) to arrive at real value added or real GDP. Tracking real GDP over time, then, gives us a way to track growth in the real size of the economy. For instance, real GDP at factor cost for India in 2008-09 was Rupees 4162509 crore, and in 2009-10 it was Rupees 4493743 crore. Thus, real GDP grew by about 8 percent between 2008-09 and 2009-10. This gives us a sense of how much, in real terms, the value of goods and services produced in the Indian economy increased between 2009 and 2010.

 GDP GROWTH IN INDIA SINCE INDEPENDENCE

 Figure 1 plots the annual, i.e., year-over-year, growth rate of “GDP at factor cost” for the Indian economy since 1952. Data for this plot is taken from Table 1.4 in the Statistical Appendix of the Economic Survey of India, 2010-11 (GOI, 2011, henceforth).

It is immediately obvious from Figure 1 that the year-over-year growth rate of “GDP at factor cost” fluctuates a lot over time. For instance, the growth rate was 7.6 percent in 1964-65, and it plunged to -3.4 the next year. Large yearly fluctuations of the growth rate characterise the growth path of the Indian economy ever since Independence. As can be seen from Figure 1A, even advanced capitalist economies like the USA display pronounced fluctuations in the growth rate of GDP. Of course for the case of India (Figure 1), there is one noticeable change in this regard: the magnitude of fluctuations has gone down since the early 1980s. Two interesting questions crop up immediately.

Why does the growth rate fluctuate so much from one year to the next? There are two sets of factors which drive the fluctuations in the annual growth rate of GDP: those emanating from the demand side of the economy, and those coming from the supply side. By “demand side” we mean the purchaser side of the market. The demand side addresses questions like the following: how much purchase of goods and services is being made, what is the nature of goods being purchased, who are purchasing them, on what factors does the volume of purchase depend, and other similar questions. On the supply side we examine production, the output of the production process. Thus, the supply side addresses questions like the following: what goods and servies are being produced, who are producing them, which factors affects the production, and other similar questions. Let us look at the demand and supply sides of the Indian economy in turn.

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FIGURE 1: Time series plot of the annual growth rate of real GDP (measured as factor cost) for the Indian economy, 1952-2009, including a five year moving average. (Data source: Table 1.4, Statistical Appendix, The Economic Survey of India, 2010-11).

 Demand for the products that are produced in the economy come from the expenditures that people make to purchase those products. These expenditures can be divided into four headings. First, consumption expenditure made by households to buy durable (like cars, radios, TVs, etc.) and nondurable (like food) items of consumption. Second, investment expenditure made by firms (for instance, to buy new machines and equipment). Notice, consumption expenditure is qualitatively different from investment expenditure in that the latter is made to produce goods, not to meet the direct requirements of a consumer. Thirdly, there is the government expenditure, which can be both for consumption or investment purpose (for instance, to buy items required by the bureaucracy, or spendings to construct roads, bridges, schools). Finally, the net export expenditure, which pertains to the global trade of the country in question (what the rest of the world buys from the country less what the country buys from the rest of the world). Expenditure decisions usually fluctuate with season, with changes in fashion, and many other factors. The fluctuations of expenditure decisions are one of the sources that lead to the large fluctuations of the annual GDP growth seen in Figure 1.

 Typically, this factor (i.e., demand) is important for advanced capitalist countries like the USA (see Figure 1A). For a country like India, on the other hand, supply side factors (i.e., factors that affect the production of commodities) are also extremely important for explaining the fluctuations of the GDP growth. This is because poor countries have started their journey of economic development late in the day. They lack the capital and other capacities to produce goods, even when there is no dearth of demand for the goods. Moreover, there is one group of commodities that is especially important in this regard: agricultural commodities. Agriculture in India is heavily dependent on rainfall, which is a supply side factor. In 2003-2006, irrigated land was only 41% of the total area under cultivation. Even within this small figure for India, there is a lot of regional variation. For instance, in the Northwest the extent of irrigation is 75%; in Central and South India, on the other hand, it varies between 27% and 34%. So, when there is a failure of the monsoons, crops fail in many parts of the country. This drastically reduces the growth rate of real value added coming from agriculture (even when there is no reduction in demand) thereby reducing the growth rate of GDP. Thus, fluctuations of the monsoons have a large impact on the growth rate of real GDP in India.

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FIGURE 1A: Annual growth rate of GDP for the US economy. (Source: Federal Reserve Bank of St. Louis website. http://research.stlouisfed.org/fred2/)

 Why did the magnitude of fluctuations become smaller after the early 1980s? The above analysis will allow us to answer this question. As long as agricultural production remains a predominant part of the economy in terms of value added (i.e., value of the output), fluctuations in agricultural production will overwhelmingly impact the growth rate of GDP. The share of real value added coming from the agricultural sector has been declining steadily over the past years in India, which fell below 40 percent around the early 1980s. Probably this constituted a threshold of sorts, after which fluctuations in agricultural production started having lesser and lesser impact on the growth rate of GDP. That is one of the reasons for the reduction in the magnitude of the fluctuations of the GDP growth rate after the early 1980s.

Since the annual growth rate of real GDP fluctuates a lot over time (as is evident from Figure 1), it is difficult to discern trends in the growth process over time. One way to get around this problem is to average them over a number of year. Hence, in Figure 1, we also plot the average growth rate for the past five years. In technical terms, this is known as a “five year moving average” plot because for every year we calculate the average of the annual growth rate of GDP for the past five years (including the current one). Thus, the moving average graph for the year 1960 would have the average of the growth rate of GDP for 1956, 1957, 1958, 1959 and 1960. Similarly, the moving average graph for the next year, 1961, would have the average of the growth rate of GDP for 1957, 1958, 1959, 1960 and 1961. In a similar manner, we move with a five year window from the starting date (1952) to the end date (2009) and generate the five year moving average plot.

The five year moving average of the annual growth rate of GDP in Figure 1 shows an interesting fact. There is a clear break in the trend of the growth rate real GDP for the Indian economy in the early 1980s. Before the 1980s, the average growth rate hovered around 4 percent. It never went above 5 percent. From the early 1980s, the average growth rate started increasing and has been consistently above 5 percent other than for brief periods during the early and late 1990s. This fact has been commented on widely: the Indian economy has witnessed a structural break in its trend rate of growth (of real GDP) around the early 1980s. Three decades of relatively slow growth has given place to a period of relatively faster growth since the early 1980s. It is interesting that this is also the period when the volatility of the growth rate also fell, as we have already indicated. Both seem to be related to the decline of the agricultural sector in terms of its share of real value added.

 SECTORAL GROWTH

 To understand the sources and implications of growth, economists typically divide up the Indian economy into 5 large sectors.

  1. The first is what we will refer to as AGRICULTURE; it includes agriculture, forestry & fishing, mining & quarrying.

  2. We will refer to the second sector as MANUFACTURING; it is composed of manufacturing, construction, electricity, gas & water supply.

  3. The third sector will be referred to as COMMERCE; it includes wholesale and retail trade, hotel, transportation and communications.

  4. We will refer to the fourth sector as FIRE; it includes finance, insurance, real estate and business services.

  5. The fifth sector will be called GOVERNMENT; it includes public administration, defence and other services.

 Figure 2 plots the 5 year moving average of the annual growth rate of the real value added for each of these 5 sectors along with the corresponding figure for GDP. A striking pattern is observed in Figure 2: other than AGRICULTURE, all the other sectors show an increasing trend in their average growth rates since the early 1980s. In other words, AGRICULTURE has witnessed relative stagnation. To look more closely at the growth rates across sectors, we break up Figure 2 into two separate graphs. In Figure 3, we plot the 5 year moving average of the growth rate of AGRICULTURE and compare it to the corresponding growth rate of GDP; in Figure 6, we plot the 5 year moving average of the growth rates of the other 4 sectors, again comparing the average sectoral growth rates with the corresponding growth rate of real GDP.

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 FIGURE 2: Five year moving average of the annual growth rate of real value added for the five major sectors of the Indian economy, 1955-2009. (Data source: Table 1.4, Statistical Appendix, The Economic Survey of India 2010-11).

AGRICULTURE

Figure 3 presents a comparison of average growth rates in AGRICULTURE and the whole economy. But before we analyse the trends in Figure 3, let us recall some data about overall growth in agriculture since independence. According to data in Table 1.3A of the Statistical Appendix of the Economic Survey of India 2010-11, between 1950-51 and 1980-81, real value in AGRICULTURE grew at a compound annual growth rate of 2.46 percent; between 1980-81 and 2009-10, on the other hand, real value in AGRICULTURE grew at a compound annual growth rate of 3.76 percent. Thus, AGRICULTURE has grown relatively rapidly since 1980 compared to its own past, i.e., between 1952 and 1980. But this picture of better performance relative to its own past is tempered by two facts. First, relative stagnation of AGRICULTURE when compared with the overall economy, and second, significant slowdown in the growth rate of food grains production and agriculture as such within the broad category AGRICULTURE.

 To see the first, let us turn to Figure 3. What does Figure 3 show? While its true that the growth rate in agriculture has always been below the growth rate of GDP with few exceptions, the difference between the two has diverged significantly since the early 1980s. Thus, from the early 1980s onwards,

AGRICULTURE has grown at a significantly slower rate than the overall economy, implying that AGRICULTURE has witnessed relative stagnation over the last three decades, i.e., relative to the overall economy. Thus, AGRICULTURE has performed better than its own past but worse than the overall economy since 1980.

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FIGURE 3: Five year moving average of the annual growth rate of real value added in agriculture and allied sectors in comparison to the growth rate of GDP (measured at factor cost) for the Indian economy, 1952-2009. (Data source: Table 1.4, Statistical Appendix, The Economic Survey of India 2010-11).

To see the second fact, we present data in Table 1 on the growth of real agricultural production for food grains (cereals, pulses and coarse cereals) and non-food grains (oilseeds, fibers, plantation and other crops) separately, and compare it with the growth of population. To compute the growth of real agricultural output, we draw on data on the index of agricultural production provided in Table 1.9 of the Statistical Appendix of Government of India (2011). An index number for agricultural production is an analytical device used by economists to track the growth of agricultural output over time. Usually a “base year” is chosen and the output in the base year is given a value of 100. The output in every other year is then expressed as a number which is larger or smaller than 100. If it is larger then 100 that implies growth in the output, and if it is smaller that implies decline in output. Data on population is taken from Table 9.7 of the Statistical Appendix (Government of India, 2011), and supplemented with the provisional population totals from the 2011 Census.

 What does Table 1 show? Let us start with long stretches of time. Over the three decade period 1980-2010, the growth of food grains was lower than but the growth of non-food grains was higher than population growth; the same pattern in observed for the four decade period, 1970-2010. This means that food grains production has been lower than population growth for the last four decades in India.

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Table 1: Growth rates of Crops and Population

 When we zoom in and look at the decades separately, an interesting pattern emerges. Other than the 1980s, population growth has outpaced growth in real agricultural output – both food grains and nonfood grains – in every decade since 1970. The 1990s was the worst decade in terms of the shortfall of food grains & non-food grains production with respect to population growth. In the 2000s, population growth outpaced food grains production (though the shortfall was smaller than in the 1990s), but nonfood grains production managed to just about keep up with population growth. This data shows unambiguously that there was a massive slowdown in the growth rate of food grains in the 1990s compared to the previous two decades. The growth rate of food grains is still way below the growth rate achieved in the 1980s and, more importantly, still below the country’s population growth. This means that the higher-than-population growth in the real value added from AGRICULTURE (in Figure 3) must be coming from growth in forestry, fishing, mining and quarrying.

 Before we look at these components, let us ask: what lies behind the slowdown in food grains production in, and since, the 1990s? The answer is that both area under cultivation has been shrinking and yield growth has been slowing down. Between 1990-91 and 2000-01, the gross area under food grains declined from 127.8 million hectares to 121.0 million hectares, a decline of about 7 million hectares (a shrinkage of about 5 percent of gross area). The main decline occurs in the area under cultivation for pulses; both rice and wheat register small increases in area. Since there is slowdown of growth for both rice and wheat production as well, there must have been slowdown in yield in both these food grains as well. Over this period, pulse production, on the other hand, registers a negative growth, more or less in line with the decline in area. Between 1980-81 and 1990-91, on the other hand, the corresponding area under food grains had increased from 126.7 to 127.8 million hectares (Table 1.13, Statistical Appendix, Government of India, 2011).

 Let us recall that AGRICULTURE includes sectors such as quarrying and mining, which are qualitatively different from cultivation. In Figure 4, we plot the index of production for various minerals, where the value of the index in the base year (1993-94) is normalised to 100. Data for this chart is from the Central Statistics Office, Ministry of Statistics and Implementation of the Government of India. The index of production for all minerals increased by 76 percent between 1993-94 and 2008-09. From Table 1 we see that this is a far higher growth than agriculture proper: between 1990 and 2010, a roughly comparable period, food grains production increased by 23 percent and non-food grains production increased by 32 percent.

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FIGURE 4: Mineral Production in India, 1994-2008 (Source: Central Statistics Office, Ministry of Statistics and Implementation of the Government of India)

When we focus on individual minerals, there is an interesting pattern visible in Figure 4. The first thing we notice is that other than gold, all other minerals show a massive increase in production since 1994. Coal, lignite and natural gas show a steady increase over this period. Three minerals stand out in terms of a spurt of growth in production from 1993-94 to 2008-09: bauxite (179 percent), chromite (255 percent), and iron ore (266 percent). Thus, it seems that a large part of the growth in AGRICULTURE is really being driven by the growth in mineral production and is not related to agricultural production per se.

 There are two implications of this fact that is worth keeping in mind. First, clubbing mining and quarrying with cultivation and analyzing the AGRICULTURE data might therefore be misleading if the purpose is to study agriculture (which employs more than half of the workforce even today). Second, the growth that is taking place in AGRICULTURE can be largely attributed to mining and quarrying. This growth, which gives rise to modern day robber barons like the infamous Reddy Brothers in Karnataka, is undoubtedly of a predatory nature. It is not only environmentally destructive in the extreme (for instance, strip mining), it also leads to forcible displacement and destruction of the livelihoods of tribal people on a massive scale. Many activists and writers, including Arundhati Roy, have argued that it is to facilitate predatory growth of this kind against local opposition that the Indian government has launched a military operation in the forested regions of East-Central India called Operation Green Hunt. In a recent interview with reporters of Bloomberg, Home Minister P. Chidambaram claimed that the State was slowly winning over control of the mining zone from Maoist guerrillas, indicating that this was in fact one of the reasons behind Operation Green Hunt. Is this the kind of growth India needs today, a growth that leads to displacement, environmental destruction and State repression? Leaving readers with this question to mull over, let us now turn to agriculture proper.

Bhalla and Singh (2009) have calculated the state level, as well as all-India level growth rate of agricultural production. We reproduce the region-wise growth of agricultural output below in Table 2.

 

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Table 2: Annual Compound Growth Rate of Agricultural Output in Different Regions

 

A deceleration of output growth from the 1990s onwards is evident from Table 2. At the all-India level, the growth rate of agricultural production declined from 3.37 percent per annum in the 1980s to 1.74 percent per annum since 1990. The degree of deceleration varies by region. The central region did not suffer as much as the rest of the country did. Eastern and southern regions were the hardest hit. But the central region alone could not sustain the overall growth rate. Annual compound growth rate at the all-India level almost halved as a consequence between 1980s and 1990s.

What could be the reasons for this slowing down? Broadly, output growth is the contribution of two factors as we have stated above. First, growth of area under cultivation. Two measures of land area are typically used. First is called the net cropped area (NCA), which is the actual size of land under cultivation. The second is referred to as the gross cropped area (GCA). Gross cropped area is the product of net cropped area and the intensity of cultivation, i.e., GCA = NCA x Intensity of Cultivation. Thus, GCA indicates how many times a year the land is cultivated. How have NCA and GCA changed over the last few decades? Growth of net cropped area has turned negative of late for two probable reasons. First, because of exhaustion of additional land which can be brought under cultivation, and second, because of diversion of land to non-agricultural uses.

 

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Table 3: Annual Compound Growth Rate of Net Cropped Area in Different Regions

 

Drawing on Bhalla and Singh (2009), Table 3 provides the data on the growth rate of NCA for different regions of the country. It is striking that the growth rates declined across all the regions, as well as at the all-India level, as we moved from the 1980s to the 1990s. As far as the growth of gross cropped area is concerned, it has been positive, but very low. At the all-India level, GCA grew at compound annual rates of 0.51, 0.19, 0.22 percent during 1962-65 to 1980-83, 1980-83 to 1990-93 and 1990-93 to 2003-06 respectively.

 

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Table 4: Annual Compound Growth Rate of Crop Yield in Different Regions

The second factor behind growth of output is the growth of yield (output per unit area). In the absence of major increases in land area under cultivation it is the rise in yield which has contributed mainly to output growth. Growth rates of output and yield have roughly moved together. Table 4 provides data of growth rate of yield, again for the different regions of the country. Like the growth of output, growth of yield has also come down rapidly in the last two decades, with the central region suffering the least.

 

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FIGURE 5: Index of Agricultural Production (Data source: Table 1.9, 9.1, Statistical Appendix, The Economic Survey of India 2010-11; and Census of India, 2011). Index of agricultural production has base year 1981-82, and the index of population has 1981 as the base year.

 

To highlight the difference in food grains and non-food grains production, we return to the data in Table 1 and represent it graphically in Figure 5, which plots the index numbers of agricultural production for both food grains (cereals, pulses and coarse cereals) and non-food grains (oilseeds, fibers, plantation crops and other crops) with 1981-82 as the base year. Thus, the output of both food grains and non-food grains is normalised to a value of 100 in 1981-82 and the output of every other year is then compared to this value. For instance, the index number for food grains was 158.4 in 2000-01. This implies that there was a 58.4 percent growth in the production of food grains between 1981-82 and 2000-01. We also include an index number of India’s population in Figure 5 to compare the growth of agricultural output with population growth.

Let us see what story Figure 5 has to tell. As already indicated with reference to the discussion on the data in Table 1, we observe from Figure 5 that there is a divergence in the growth paths of food grains and non-food grains, with the former growing at a slower rate than the latter. The growth rate diverges in the 1990s and even more so since 2000-01. There has been some convergence since 2007-08, but that is because growth of non-food grains production has declined (from 2007-08 onwards) faster than the decline in growth of food grains production (from 2008-09 onwards). Overall, there is an unambiguous story: between 1980-81 and 2009-10, food grains production has grown much more slowly than non-food grains. Referring to Table 1, we can see that between 1980 and 2010, the index of food grains production increased by 68.35 percent; over the same time period, the index of non-food grains production increased by 112.36 percent.

NON-AGRICULTURAL SECTORS

Let us now turn to the other four sectors of the Indian economy: MANUFACTURING, COMMERCE, FIRE, and GOVERNMENT. Figure 6 plots the five year moving average of the annual growth rates of real value added from these four sectors. Each plot also has the corresponding growth rate of real GDP to compare the performance of the sector with the overall economy. What does Figure 6 show?

 The average growth rate of real value added in MANUFACTURING has been very similar to the corresponding growth rate for the whole economy since the early 1980s; the two lines basically hug each other from the early 1980s. What is striking is that the growth rate for MANUFACTURING was substantially higher than the growth rate of GDP in the 1950s and 1960s. This was the heyday of Nehruvian socialism when India followed the strategy of heavy industrialisation as the spearhead, a la Mahalanobis. The relatively higher growth rate of MANUFACTURING value added has been reversed since the early 1980s.

 COMMERCE, which includes wholesale and retail trade, hotels, transportation and communications, has generally grown faster than the overall economy for all the post-independence years. During the 1950s and 1960s, the growth rate in this sector was substantially higher than the growth rate of real GDP; a similar scenario has unfolded since the late 1990s. Since the earlier period was also a period of high growth in MANUFACTURING, one could see that the growth in COMMERCE came from the growth of transportation. Probably, this is not true during the recent period (because MANUFACTURING has not be growing very rapidly). The current growth could be driven by growth in the service sector.

 The average growth in the FIRE sector shows a most striking pattern. The average growth rate in this sector was below the growth rate of real GDP till the 1960s, came up to the growth rate of real GDP in the 1970s, and has accelerated much faster than the growth rate of real GDP since the early 1980s. The 1980s saw a phenomenal rate of growth in this sector, which slowed down relatively in the next decade. But all through the years, the growth rate of value added (if that term is at all meaningful for this sector) has been higher than the growth rate of real GDP. This is very much along expected lines: the neoliberal policy orientation since the mid-1980s has facilitated the growth of this largely parasitic sector of the economy.

 

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FIGURE 6: Five year moving average of the annual growth rate of real value added for four major sectors of the Indian economy in comparison to growth rate of GDP (measured at factor cost), 1952-2009. (Data source: Table 1.4, Statistical Appendix, The Economic Survey of India 2010-11).

 

The growth rate of real value added of GOVERNMENT, which includes public administration & defence, has been roughly equal to the growth rate of real GDP. From the mid-1960s to the early 1980s, this sector grew faster than the overall economy; since then, its growth rate has moved in line with the growth rate of real GDP, fluctuating around it. In the recent years it has been consistently lower than growth of GDP.

 SOME IMPLICATIONS AND COMMENTS

The first implication that we would like to draw the attention of the reader to is the agricultural sector. This sector continues to employ more than half the workforce. When we juxtapose this to the relative stagnation in this sector since the 1980s, we have a very solid explanation of the growing inequality in Indian society observed since the mid-1980s. More than half the population is forced to work, because of lack of employment opportunities elsewhere, in the sector that is growing much slower than the other sectors of the economy. This is naturally leading to widening disparities of income and wealth over time.

 This growth is not benefiting the largest sector of the economy, i.e., agriculture, either in terms of output or employment, as much as it is benefiting the other sectors. To put it bluntly, it is creating few jobs in the vast rural hinterland. A natural question that comes to mind is this: is this growth, which has a narrow base, sustainable? Which factors are driving the high growth?

These are important questions and lie beyond the scope of the present article. The following view offered by the Economic and Political Weekly editorial (EPW, 2012) however warrants attention and detailed research (refer to this article of Aspects of India’s Economy for data and elaboration of some of the points discussed below). The acceleration of growth in recent times has been dependent upon elite consumption and private investment expenditures. The trigger for these variables has been the inflow of global capital, courtesy whittling down of capital control by successive regimes. Inflow of funds led to increased liquidity in the system, pushed up consumer credits and has created wealth effect. GDP grew at a fast pace due to demand side pull. High consumption expenditure have encouraged private investment as well. This investment is geared towards the production of goods demanded by a narrow sliver of the population. High growth in a part of the economy is not percolating to lagging sectors such as agriculture, because of the weakening interdependence between sectors. With the financial crisis gripping the world, the age of easy money seems to be ending. Initially, the government attempted to counter the drying up of inflows through a Keynesian stimulus package (i.e., raising government spendings). The Sixth Pay Commission award came handy in this regard too. For these reasons, Indian growth did not suffer very much in the immediate aftermath of the 2008 crisis. There have been large external commercial borrowings by Indian companies as well. However Keynesian measures only expose the contradictions within the capitalist economy. Higher government spending and deficits scare investors, and therefore are not helpful when the strategy is to attract foreign funds. With the global crisis showing little signs of relenting and capital inflows drying up, the government has been resorting to desperate tactics by relaxing the norms of foreign investment to dangerous levels, as we remarked in the 2011-12 budget discussion. Pranab Mukherjee, the Finance Minister, has already started making trips to foreign destinations to woo investors. But even these maneuvers are not helping matters. In the last one year the growth rate of GDP has fallen below 7 percent, and it is expected to be low in the near future.

Before presenting the main conclusions of this article, we would like to offer a small caveat regarding the acceleration of, and slowdown in, current economic growth. The hypothesis that it is the foreign capital inflow which has been responsible for high growth needs further research before it can be accepted. One way in which the transmission mechanism may work is that capital inflow reduces the cost of borrowing and pushes up net borrowing by households, which then go towards financing high consumption. If this has been going on, liabilities of households compared to their assets should be moving up over time as they go deeper into debt. Figure 7 plots the data on change in assets and liabilities of households in India since 1970-71. It can be seen that the assets have been growing at a faster rate than liabilities. Indeed, the divergence between the two has been rising. Although this evidence appears to go against the above hypothesis, it is important to remember that this is only aggregate data. Further examination of asset-liabilities of different sections of households, rise in the wealth of households that is linked to financial markets, consumption patterns etc. should be conducted before a conclusion is reached.

 CONCLUSION AND DISCUSSION

Growth in the total value of goods and services produced by an economy, measured by a construct like the GDP, is potentially useful because it enlarges the total economic pie available to society. Since the economy is composed of several different sectors, it is important to complement a study of aggregate economic growth with a study of its sectoral patterns. Which sector is growing fast? Which sector is lagging? This has very important implications for the material conditions of the working people of the country, for social and economic inequality, for the sustainability of the growth process.

This article has presented evidence on the sectoral pattern of growth in India which shows that there is a clear divergence in the growth paths of the sectors. Since the early 1980s, agriculture & allied sectors (which includes, other than agriculture, forestry, fishing, mining and quarrying) has been a significant laggard in terms of growth of output. Moreover, if we look only at agriculture proper, the stagnation in the growth of output is even more striking. Since the early 1990s, production of both food grains and non-food grains has significantly slowed down compared to the 1980s, with food grains production falling below population growth. This has very serious implications.

 

 dipfig7.gif

FIGURE 7: Changes in financial assets and liabilities of Indian households, 1970-71 to 2010-11. (Source: Table 11, Handbook of Statistics on the Indian Economy 2010-11, Reserve Bank of India.)

 

First, since more than half of the workforce continues to be “employed” in agricultural production, the relative stagnation in agriculture means growing income and wealth inequality in society. The common point made by left political activists is true: the growth process has bypassed the majority of the Indian working people. Second, since the growth process does not rest on the expenditures of the vast majority, it is not broad-based enough to be sustainable over the long term. There is some evidence that the growth process in India was largely supported by expenditures of the rich and middle classes which, in turn, was assisted by the flow of foreign capital. With the global financial crisis contributing to the drying up of this flow into India, the growth process in India seems to have hit a roadblock. To get around this problem the government has been adopting measures which will further aggravate the conditions of working people by reducing livelihood opportunities. These measures include permitting more foreign capital in both single and multi-brand retail business, in insurance, banking, aviation, sale of profit-making public sector enterprises, etc. The government aims to reinvigorate the manufacturing sector, which is undoubtedly a noble aim. However the manufacturing policy that it is planning to push down the throats of people will create SEZ-like enclaves, called the NMIZs (National Manufacturing and Investment Zones). These islands will be free from many labour laws and environment protection regulations of the land. At best, this redirection of manufacturing policy will only have a doubtful effect on the growth of manufacturing output. But it will certainly redistribute wealth and income away from the poor and towards the rich, and at the same time compounding problems of environmental sustainability.

 There are at least two approaches to deal with the growth slowdown. The first is to adopt massive redistribution policies and widen the social and economic base of aggregate demand. It should be coupled with increasing the production capacity of sectors that are constrained on the supply side, like agriculture, and small scale manufacturing. Hence, this will mean both supporting agriculture in the medium run and facilitating a relatively smooth transition of labour out of agriculture over the longer term. It will also mean putting employment generation at the very center of the growth process and not waiting for adequate employment to be generated as a byproduct of GDP growth (for a forceful argument along these lines, see Bhaduri, 2006).

Second, continue with business as usual, woo more foreign funds and continue with a narrow social and economic base of aggregate demand. While the first strategy will make the growth process more sustainable and equitable, the second will make it more precarious and inequitable. It speaks volumes about the nature of the Indian State that it has chosen the second.

Given the clamour from the business lobbies and the corporate media for restoring “investor confidence” as a way to push for economic growth, the upcoming union budget we fear, can be another step in the direction of shoring up the wealth of a very narrow section of the Indian population. The demand for pro-people economic policies cannot come at a more opportune time. This demand must, at the very minimum, include extension of credits and production subsidies to peasants and the unorganised sector manufacturers, imposing an appropriate and equitable tax structure on the corporate sector, putting a stop to pandering to the whims of global capital – in fact imposing greater control over the inflow and outflow of capital – and stopping the mindless rush to encourage mining of an already damaged ecosystem.

REFERENCES

 Bhaduri, A. (2006). Development with Dignity. National Book Trust, India.

 Bhalla, G. S., and G. Singh. (2009). “Economic Liberalisation and Indian Agriculture: A Statewise Analysis”, Economic and Political Weekly, vol. 44, no. 52.

 Economic and Political Weekly Editorial (2012). “Starting to Unravel”, Economic and Political Weekly, vol. 47, no. 2.

 Government of India. (2011). Economic Survey of India 2010-11. Available for download at: http://indiabudget.nic.in/

1 Comment »

One Response to “Economic Growth in India: A Sectoral Account”

  1. Anonymous Says:
    May 4th, 2012 at 7:37 am

    too good

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