The Real Economy of India

Economy: Main Constituents

Agriculture sector or otherwise known as the ‘primary sector’ comprises agriculture and allied activities like crop production, horticulture, plantation crops, farm mechanization, land development and reclamation, digging of wells, tube wells and irrigation projects, forestry, construction of cold storages and warehouses, processing of agri-products, finance to agri-input dealers, allied activities like dairy, fisheries, poultry, sheep-goat, piggery and rearing of silk worms.

Industrial sector or the Secondary sector consists mainly of mining and quarrying; manufacturing and electricity; gas and supply.

The services sector or the tertiary sector includes trade, hotels, restaurants, transport storage and communication; financing, insurance, real estate and business services; community, social and personal services and construction.

Gross Domestic Product(GDP)

According to the Central Statistical Organisation (CSO), the Indian economy recorded a real GDP growth of 8.0 per cent in the second quarter of 2005-06.

When an economy grows at, say 5 %, it implies that the average growth of the 3 sectors within the economy, namely agriculture, industrial and services are growing at an average rate of 5%.

The data by CSO says that, the agricultural growth in real terms during the second quarter (July-September) of 2005-06, is 2.0; industrial sector 7.6 and tertiary sector 9.8.

The slow growth of the primary sector has been mainly attributed to the weak monsoons.

Business Expectation: A digression

Business expectation surveys suggest that the current phase of industrial activity is likely to continue in the near future. According to the Reserve Bank’s latest Industrial Outlook Survey, the Business Expectations Index for January-March 2006 quarter increased by 2.4 per cent over the previous quarter. Survey results indicate that employment, selling prices, imports and profit margins are expected to improve during the quarter January-March 2006 vis-à-vis October-December 2005.

What the ‘growth’ comprises

The area under kharif crops was 1.2 per cent higher than a year ago, led by increased area under rice, maize, pulses and sugarcane. As regards rabi crops, the area coverage as on January 2, 2006 was 1.5 per cent higher than a year ago on account of increased coverage in respect of major crops such as wheat and rapeseed.

The mining and electricity sectors, on the other hand, recorded a deceleration. The sharp slowdown in the mining sector may be attributable in part to a decline in production of crude oil caused by the break-out of fire in the Mumbai-High oil field in July 2005 and the adverse impact of heavy rainfall on coal mining activities. Lower growth in the electricity sector is attributable to shortage of coal and gas.

Robust growth in the cellular subscriber base broadband connections supported the strong growth in the communication sector.

Sustained growth in bank deposits and non-food credit as well as increased exports of information technology enabled services boosted the sub-sector ‘financing, insurance, real estate and business services’.

These are some of the reasons mentioned by the RBI for the growth in real GDP.

Growth projections

Agencies like ADB, CII, CRISIL, NCAER, IMF and RBI have projected the Real Gross Domestic Product for India during 2005-06 to be over and around 7.0. This reflects a bright prospect for the people of India. Is it so?

Current Scene


Link: The Hindu

Conclusions

The current GDP rate is exuberating and so are the projections. All the hype is on the growth rate. The politicians’ rhetoric is that India is growing as its GDP is rising. The agricultural sector is weak, structurally. More reason to be worried is because of the fact that more than 50% of the Indian populace are dependent on agriculture for their livelihood. The number of farmer suicides in Vidarbha and even in highly literate states like Kerala, speaks of discontentment. Relying only on the GDP and expecting the ‘trickle down effects’ to comply is nonsensical. Even if the high rates of GDP brought forth positive externalities, the time lag required for ‘these benefits’ to reach the masses would be large.

It is a commendable and laudable fact that India is improving it’s IT related exports. IT sector definitely seems resplendent.

Even if ‘trickle down effects’ ensued, all the benefits have gone to the middle class sector. More people are becoming better off with this sector.

The main concern is that of sustaining the realised growth of services and improving upon the primary and secondary sectors. The issue of ‘sustainable development’ should be our main concern. Lop sided development cannot be sustainable in the long run. Therefore, resting on a weak agricultural base is dangerous.

References

1) RBI: Third Quarter Review 2005-06, The Real Economy .

12 thoughts on “The Real Economy of India

  1. Why would you say Agri sector is structurally weak ? and tell me, where does ITC,hll etc count- which markets agri products. primary or service sector ?

  2. BVN,
    The agricultural sector employs more than 50% of the total populace of India but contributes a meagre 2% to 3%. This means that there is disguised unemployment, ie there are more workers than required working. This leads to lesser productivity.
    ITC, HLL are companies like that engage in agricultural activities, namely processing of agri-products. As a whole they cannot be classified as either agriculture or service sector.

  3. hi alex:

    yes when we do compare the agriculture with other sectors like services and industry we can see the disperencies in returns to labour… most of the revenue stream goes to the distributors and retailers of agri products….

    also its ironical that as opposed to conventional theories of higher risk — higher returns…in the agriculture sector in india…the farmers solely bear the highe risk of monsoons and demand at no higher returns … the distributors and the retaliers do not bear any such risk…could we not have risk premiums more even across the revenue stream….through crop insurance and weather insurance where premiums are payed by all in the revenue stream in correpoendence to their value added…

    well these are some of my views….good piece though…helps one see behind the single figure GDP growth…

    regards
    thinley

  4. Alex,
    Excellent job of dissecting Indian GDP, and highlighting the issues beyond growth. Growth that doesn’t benefit the agricultural sector is almost no growth at all, for a lot of Indians.

    BTW, you may want to check out Amartya Sen, who has made the point that GDP growth is only a partial indicator of economic progress, and who’s work led to the UNDP’s Human Development Index.

    Also, the World Bank uses a measure for GDP called the Gross National Income (GNI). I’m not sure what the difference is, but maybe you can? :)

  5. Dweep,
    Thanks for the tip. I will do that. I had earlier written about the HDI.

    GDP just shows output whereas the real GNI per capita indicates the development of real purchasing power per person. More can be read here.

  6. Thinley,

    You are right in saying that where there are high risks the returns will be high.[Returns come at a certain cost, which is referred to as the risks.]

    Agriculture depends on a lot of exogenous factors, a lot of risks which can be forseen, only to a certain extent. This makes this sector higly dependent on natural factors such as rainfall, the water table of a place, soil characteristic etc.

    This calls for more studies relating to the environment and allied factors.

  7. Even with the booming economy, the quality of life has gone down. Even in cities, the quality of foodgrains, vegetables which impact our health is going from bad to worse. So instead of looking at agri in terms of percentages or being a drag on the economy, stress must be on an even growth. That makes Agri our top priority.

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  9. Ranjan,

    Yes, the GDP does not account the Black Economy.

    The black economy in India has grown from 4 per cent of GDP in 1955-56 [Kaldor 1956] to 40 per cent in 1995-96 [Kumar 1999], and by all indications, it is continuing to grow. [Kumar 2006]

    I have no plans to do the budget analysis as yet. Though i will be doing a post on the Black Economy by drawing heavily from Arun Kumar’s work. He has even a book to his credit on the same.

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