Indian Economic Growth

India has withstood the global crisis beyond most would have expected. Even while the rest of the world has been recovering, India and China (credibility of growth is at stake) have not only bounced back but has now started to grow at a very steady and sure rate. In fact a quick glance at S&P and Sensex performance over the last 10 years will highlight the incredible performance of this much ignored economy. A quick analysis of the difference facets of this growth should give us ample data to compare the Indian story with that of US, Brazil and China. Indian economy has somewhat maintained consistency in growth for the past four quarters. The basic economic indicators are quite robust and are expected to continue to be steady in the near to medium term. Inflation has been an area of concern. In the past six months, its average growth rate has been 9.8% which prompted RBI to take measures that led to firming up of interest rates.

Quarters % GDP Growth Q1 2010-11 8.8 Q4 2009-10 8.6 Q3 2009-10 6.5 Q2 2009-10 8.6 Current macro economic indicators point to the sustainability of economic growth in fiscal year 2010-11. Better performance of agriculture on account of good monsoons coupled with higher growth in industry and service sectors are expected to buttress the economic performance. GDP is expected to post 8.5% growth in the fiscal 2010-11. Growth of individual sectors according to DES is given below:

Current macro economic indicators point to the sustainability of economic growth in fiscal year 2010-11. Better performance of agriculture on account of good monsoons coupled with higher growth in industry and service sectors are expected to buttress the economic performance. GDP is expected to post 8.5% growth in the fiscal 2010-11. Growth of individual sectors according to DES is given below:

Industrial Growth

On the industrial front, the general Index of Industrial Production (IIP) registered 10.6% growth during the first five months (April-August) of 2010-11 as compared to 5.9% during the same period last year. Manufacturing sector which accounts for nearly 4/5th of the weight age grew by 11.3% as compared to 5.6% during the same period last year. Growth in IIP slowed to 5.6% from 15.2% in the previous month. Industrial output continues to be volatile.

In August 10 Mining, Manufacturing and Electricity sectors grew at 7.0%, 5.9% and 1.0%, respectively. Lower growth in manufacturing and electricity pulled down the IIP growth in August 2010. The industrial growth seems to be broad based as indicated by the number of growing industries. 14 out of 17 industry groups have shown positive growth in August 2010 as compared to the corresponding month of the previous year. What is more interesting is that out of the 14 industry groups, 7 groups witnessed double-digit growth rates. Double-digit growth has taken place in industries like transport equipments, metal products & parts and machinery and equipment. These are the industries having backward and forward linkages. Their growth is linked

to the growth of sectors like automobile and steel which have also shown a much better performance as compared to the previous fiscal. It is noteworthy that most of the growth has taken place in the capital intensive sectors. Labor-intensive sectors like textiles and wood posted a flat or even negative growth rate. Wood and wood products industry grew at a negative rate of 10.6% during April to August period of 2010-11. The industrial growth seems to be broad based as indicated by the number of growing industries. 14 out of 17 industry groups have shown positive growth in August 2010 as compared to the corresponding month of the previous year. What is more interesting is that out of the 14 industry groups, 7 groups witnessed double-digit growth rates. Double-digit growth has taken place in has taken place in industries like transport equipments, metal products & parts and machinery and equipment. These are the industries having backward and forward linkages. Their growth is linked to the growth of sectors like automobile and steel which have also shown a much better performance as compared to the previous fiscal. It is noteworthy that most of the growth has taken place in the capital intensive sectors. Labor-intensive sectors like textiles and wood posted a flat or even negative growth rate. Wood and wood products industry grew at a negative rate of 10.6% during April to August period of 2010-11.

On M-o-M basis, IIP growth has been highly volatile. It declined to as low as negative 11.4% in April 2010. Performance of use-based industry is encouraging. Growth in the case of capital goods and consumer durables is a low base effect. Overall growth has been encouraging although sustainability of such a high growth is questionable amidst increasing interest costs.

Infrastructure Index
The Index of Six core industries having a combined weight of 26.7 per cent in the Index of Industrial Production (IIP) registered a lower growth of 2.5% in September 2010 as compared to 4.3% registered in September 2009. This growth was also lower as compared to 3.9% recorded in the just preceding month of August 10 and the lowest in the first six months of the current fiscal. During April-September 2010-11, the six core industries registered a growth of 4% as against 4.5% registered during the corresponding period of the previous year. The key energy sectors comprising of coal, electricity and petroleum refinery products recorded an abysmal growth of -2%, 1.3% and -10.2% respectively which pulled down the growth of the overall infrastructure index. Lower growth in the key energy sectors is an area of concern. However, the key infrastructure segments comprising of cement (+5.2%) and steel (+5.8%) recorded better growth as compared to the growth recorded in the last three months. This is because the infrastructure development has picked up post the monsoons.

With high weight age sectors like electricity (10.2% weight in IIP) showing lower growth for the second straight month, IIP for September 2010 is expected to remain subdued and may even record a low single digit growth.

Conclusion
The Indian growth story is far from over. India has shown real progress in the last decade and there is nothing in the data, that India is anywhere close to a slowdown even with RBI raising rates over the last few months and set to continue well into 2011. If there are complains about the growth story, it is that India could have done even better if only India were blessed with a set of honest ministers thus bringing down the level of corruption in India and hence the cost to doing business.

Summing Up
The new industrial policy of 1991 un-caged the competitive spirit of industry by abolishing industrial licensing in almost all industrial sectors, abolishing restrictions on MRTP companies, terminating the phased manufacturing programme, substantially freeing foreign direct investment and import of foreign technology, and freeing areas hitherto reserved for the public sector. This policy reform removed almost all restrictions on new entry into the industrial sector. Over the years, the trade regime has also been modified substantially so that there are now no quantitative restrictions on the import of industrial goods. At the same time the tariff structure has been brought down considerably thereby reducing the protection available to Indian industry. Indias participation in the globalization process has been fruitful on a number of counts. There has been a turnaround in growth shortly after the balance of payments crisis of 1991, followed by a high growth phase during 1993-94 through 1996-97. While the economy subsequently entered into a long-drawn downturn in the second half of the 1990s, the recent performance has thrown up increasing signs of resilience and robustness of the growth process. The absorptive capacity of the industrial sector increased after the initiation of liberalization process, which has impacted on its size and spread. The globalization process also brought about changes in the expenditure pattern of the industries. The costs of production, including interest payments declined which resulted in increased profitability of the factory sector. The integration of the markets enabled the firms to expand their markets beyond their traditional destinations. Increased M&as is the direct outcome of globalization, which led to increase in R&D activities in many of the sunrise industries. The industrial performance has been broadly in tandem with the trends at the aggregate level. The globalization process, at the end of the arduous restructuring, has given rise to a competitive industry ready to take on the mighty world. However, there are a few areas of concerns, which need to be addressed expeditiously. The first and foremost is to facilitate the restructuring process in the SSI sector ensuring its smooth transition and subsequent resurgence. Incidentally, to a great extent, Indias exports performance is predicated upon the successful 20 restructuring of the SSI sector. The exercise could be buttressed by relaxing the other structural constraints impinging on Indias exports drive. Particularly, the SEZ policy could be refurbished in the light of the Chinese experience. Infrastructure seems to hold the key not only in sustaining the BPO boom for the Indian manufacturing but also in providing a durable basis to Indias exports competitiveness. The package of reforms that has been carried out over the past 12 years was also expected to lead to significant industrial restructuring. The reduction in import protection and the introduction of new competition were expected to lead to a reallocation of resources more in line with Indias comparative advantage in the international industrial economy. Resources should have moved from the more capital-intensive sectors to the more labor using ones, leading to both higher output and employment growth. The shift of resources to more labor using industries will, however, not take place unless this is accompanied by labor reform. It is felt that much more flexibility is required for industrial restructuring in terms of more rapid bankruptcy procedures, easier reallocation of

capital, faster transformation of urban land use, and flexibility in labor use. Industrial restructuring has also been made difficult by the Urban Land Ceiling Act, which made changes in land use very difficult. Accomplishment of the envisaged legislative changes will provide for much greater flexibility. Putting in place a social security mechanism for workers displaced due to industrial restructuring is important. The other main rigidity inhibiting investment in labor using industries is the obsolete policy of small scale industry reservation. The attainment of both higher volume growth and of higher unit value realization will require both larger scales of operation and higher quality. It is therefore essential to loosen constraints in these sectors so that they can grow freely in volume, utilize better machinery, graduate up to higher technology levels, and utilize better international marketing channels. Moreover, the Indian industry needs to invest much more actively in skill building, in product quality up gradation, and in R&D. The experience of the most successful developing countries in the recent period suggests that globalization transforms market structure through behavioral responses of incumbent firms and entrants to enhanced freedom of choice. The globalization process leads to; inter alia, changes in the expenditure pattern of the 21 industries, reduction in cost, increased M&As. Unlike East Asia, where the manufacturing sectors share in GDP declined sharply over the last decades, in India, the share in the 1990s has remained broadly the same. The increasing investment impulses in the Indian industries, particularly in attracting more FDI may change the industrial structure further to cope with the international competition. This learned audience may recall the recent Goldman Sachs Study, which has prognosticated India to be among the top four economies of the world over the next fifty years. In this context, the Study has highlighted, inter-alia, the role of increasing openness in the pursuit of higher and sustained growth. It is perhaps apposite that the areas of policy action suggested above are expeditiously addressed which would facilitate an early launch of the country in the leading league of nations.