How is Indian Industry Faring?
With
outsourcing of services emerging the employment issue of the times,
the performance of India's services sector is under scrutiny. In a recent
article in the Financial Times (September 1, 2004), Stephen Roach, the
chief economist of Morgan Stanley declared: ''The impetus that services
have given to India's growth has been … impressive. The services portion
of India's GDP increased from 40.6 per cent in 1990 to 50.8 per cent
in 2003 – accounting for 62 per cent of the cumulative increase in GDP.''
There is one important problem with such an assessment. It often tends
to generalise the dynamism, albeit from a small base, of IT-enabled
and software services to the services sector as a whole. As
Table 1 indicates,
the services share in GDP increased by close to 9 percentage points
between 1990-91 and 2001-02, which was much higher than increases during
earlier decades. But a decomposition of that increase suggests (i) that
public administration and defence was an insignificant contributor to
that increase contrary to the belief in some quarters; and (i) the increase
was almost equally due to Trade, hotels and restaurants, Transport,
storage and communications and Financing, insurance and real estate
Table
1: Percentage points Change in Shares in GDP of Selected Services |
|||||
|
1950-51
TO 60-61 |
1960-61
TO 1970-71 |
1970-71
TO 80-81 |
1980-81
TO 90-91 |
1990-91
TO 2001-02 |
|
Trade,
hotels & restaurant |
1.2 |
1.1 |
1.3 |
0.4 |
2.5 |
Transport,storage
& comm. |
0.6 |
0.7 |
1.6 |
0.0 |
2.2 |
Financing,ins.,
real estate & business services |
-0.6 |
-0.2 |
0.6 |
3.2 |
2.8 |
Community,social
& personal services |
-0.2 |
1.5 |
1.0 |
0.5 |
1.3 |
Public
administration & defence |
0.3 |
1.4 |
1.1 |
0.4 |
0.1 |
Services |
1.0 |
3.2 |
4.4 |
4.0 |
8.9 |
The
first of these features is positive inasmuch as it indicates that services
growth is not just a fall-out of rising government expenditure. However,
the second suggests that there has been a generalised expansion in private
services. This suggests that assessments based on the aggregate services
figure do not take full account of the nature of the expansion of the
services sector, separating out the more dynamic elements epitomised
by IT-enabled and financial services from segments that could reflect
the distress-driven spill over into services activities of a population
driven out of land and not absorbed by industry.
The possibility that the latter is an important influence on the growth
of services arises from the growing evidence that the commodity producing
sectors, viz. agriculture and manufacturing are either in crisis or
performing poorly. Consider for example the manufacturing component
of the industrial sector. Its share in GDP (Chart
1)
has
fallen during the second half of the 1990s and immediately thereafter.
And that fall has characterised both the registered and unregistered
manufacturing sector. Given the fact that the share of manufacturing
in India was already smaller than in many other successful developing
countries, this trend should give cause for concern. In fact this has
led some economists like Vijay Joshi of Oxford University to argue (Business
Standard September 2, 2004) that even though India features among the
world's top growth performers during the last two decades, the character
of that growth ''raises doubts about whether it can be maintained at
its present rate''.
However, overall such concern has been limited, if not altogether missing,
for a number of reasons. Post-liberalisation, there has been a substantial
increase in the extent of ''product innovation'' or availability of
new manufactured goods in the Indian market. International firms that
were permitted limited entry into the Indian market prior to liberalisation
are increasingly visible in recent times. Profit figures of some Indian
manufacturing firms suggest that they are in robust health. And official
figures of the growth of manufacturing output point to a substantial
degree of buoyancy in the manufacturing sector.
However, many of these are superficial indicators of industrial performance.
Product innovation could be accompanied by a decline in domestic value
added, because of a rise in the import intensity of domestic production.
Transnational firms could be displacing domestic production or acquiring
Indian firms rather than contributing to any net increase in output.
And higher profits for a few may be accompanied by lower profits or
losses for the majority. What is more, the profitability of at least
some of the successful firms could be due to ''other income'' from activities
outside manufacturing, especially their participation in financial activities.
The real indicators of performance, therefore, are the actual figures
of trends in production. Unfortunately, close scrutiny of these figures
does not provide a satisfactory answer. As
Table 2 shows, the lead indicator of industrial performance, the
Index of Industrial Production, suggests that after close to two decades
of depressed growth, the trend rate of growth of manufacturing recovered
to 6.1 per cent during the decade starting in 1985-86. That rate of
growth was indeed creditable, even if below that touched during the
decade-and-a-half immediately after the launch of planned development.
Further, this creditable rate of growth of manufacturing appears to
have been sustained during the subsequent years as well.
Table
2: Annual Trend Rates of Growth based on the IIP |
||||
|
Total |
Manf. |
Min.
& Qu. |
Elect. |
|
1950-51
to 64-65 (a) |
7.2 |
7.1 |
5.9 |
13.6 |
1965-66
to 79-80 (b) |
4.7 |
3.8 |
6.9 |
6.2 |
1965-66
to 74-75 (b) |
4.3 |
2.7 |
9.4 |
3.8 |
1975-76
to 84-85 (c) |
4.9 |
4.3 |
6.6 |
7.3 |
1985-86
to 94-95 (d) |
6.2 |
6.2 |
4.2 |
8.3 |
1994-95
to 03-04 (e) |
5.7 |
6.1 |
2.6 |
5.3 |
Notes:
a) Based on series with base 1950-51 =100
b) Based on series with base 1970 =100
c) Based on series with base 1970 =100
d) Based on series with base 1980-81 =100
e) Based on series with base 1993-94 =100
This picture of industrial buoyancy is not just corroborated but strengthened
by figures on trends in GDP in the manufacturing sector. The GDP in
registered manufacturing not only grew at a faster rate (of 6.9 per
cent) during 1985/86 to 1994/95 than suggested by the IIP, but that
rate of growth rose by a full percentage point to 7.9 per cent during
1994/95 to 2002-03. This brought it close to what was achieved during
the first three Five Year Plans. The unregistered manufacturing sector,
data for which is as expected less reliable, is also reported to have
grown in recent years at rates higher than recorded during any time
in India's post-Independence history. (See
Table 3)
Table
3: Annual Trend Rates of Growth of Manufacturing GDP |
||||
|
Manufacturing |
Registered |
Unregistered
|
||
1950-51
to 64-65 |
6.7 |
8.2 |
5.2
|
|
1965-66
to 79-80 |
6.5 |
7.2 |
5.3
|
|
1965-66
to 74-75 |
4.2 |
4.5 |
3.9
|
|
1975-76
to 84-85 |
5.4 |
6.2 |
4.2
|
|
1985-86
to 94-95 |
6.1 |
6.9 |
4.8
|
|
1994-95
to 02-03 |
6.1 |
7.9 |
5.7
|
|
Differences between trends in GDP in registered manufacturing and in
the IIP are to be expected. While initial estimates of GDP in registered
manufacturing for any year are based on trends in the IIP, these figures
are subsequently revised based on the results of the Annual Survey of
Industries. The latter, because of its methodology and coverage, is
considered a more reliable source of information on the registered manufacturing
sector. Further, it has been argued in the past that the IIP underestimates
the rate of growth of the registered manufacturing sector, which tends
to be higher when computed from value added figures provided by the
ASI with a lag.
However, there is reason to believe that this alone cannot explain recent
differences in the rates of growth of manufacturing GDP and the IIP.
Table 4
provides a comparison between annual rates of growth of registered manufacturing
based on value added figures from the ASI deflated by the GDP deflator
and the rates yielded by the IIP. There are gaps in the series because
data problems have resulted in the information for particular years
being excluded from the time series on principal characteristics of
the factory sector provided by the ASI on its web site. The available
figures suggest that, while it is true that during most years in the
1980s the IIP yielded rates of growth which were lower than warranted
by the ASI figures on value added and value of output, in the 1990s
the reverse seem to be true and with rather wide margins in some years.
Table
4: Annual Growth Rates of Value of Output and Value Added from the ASI and the IIP Rates of Growth of: |
||||
|
VoO
ASI |
NVA
ASI |
IIP
|
||
1982-83 |
11.8 |
9.7 |
1.4
|
|
1983-84 |
1.4 |
12.9 |
5.7
|
|
1984-85 |
6.4 |
-2.2 |
8
|
|
1988-89 |
9.3 |
11.5 |
8.7
|
|
1989-90 |
14.7 |
13.3 |
8.6
|
|
1990-91 |
8.4 |
11.3 |
9
|
|
1991-92 |
-1.3 |
-5 |
-0.8
|
|
1992-93 |
12.2 |
18.4 |
2.2
|
|
1996-97 |
4.8 |
6.9 |
7.3
|
|
1997-98 |
9.8 |
3 |
6.7
|
|
1998-99 |
-10.9 |
-16.9 |
4.4
|
|
1999-2000 |
12 |
4.2 |
7.1
|
|
2000-2001 |
-3 |
-12.9 |
5.3
|
|
2001-2002 |
1.1 |
-2.2 |
2.9
|
|
In
sum, the use of alternate series on output and value added in the registered
manufacturing sector yields results relating to its rate of growth that
do not permit any clear judgement on how Indian industry has been faring.
If the ASI is adopted as a more reliable source, performance appears
to be poor or even pathetic; but if the IIP or GDP figures are taken,
the performance is indeed good. In the event, we are left with no clarity
about the actual performance of the industrial sector. However, the
point to note is that the stagnation and decline of the share of GDP
contributed by the manufacturing sector occurs despite the high rates
of growth in manufacturing GDP reflected in figures from the National
Accounts Statistics.
This implies that answering the question as to whether the stagnation
and decline in manufacturing GDP and the rise in the share of services
in GDP is the sign of a new dynamism associated with a new growth trajectory,
requires assessing more disaggregated data wherever available. Till
such time that such an assessment is made, optimistic generalisations
regarding India's growth performance and prospects have to be treated
with some scepticism.