3-speed economy

There's a huge gap between long-term growth rates in different sectors

On three engines
Output as per cent of GDP						Financial year to Mar 31
		1997		2003		2004*
Agriculture		28.5		21.9		22.6
Manufacturing		18.2		17.2		17.1
Transport&Hotels		20.9		24.1		24.7
Finance&Insurance		11.3		13		13.1
Community& Social Services		11.4		13.7		12.7
*Up to third quarter

It's not only the 16.9 per cent growth in agriculture that's responsible for the record-busting gross domestic product (GDP) growth in the third quarter of FY2004.

If you leave out agriculture from the Q3 figures, the rest of the economy grew at a scorching 8.2 per cent, compared with Q3 of the previous year.

What's more, non-agricultural output in Q3 rose by 5.9 per cent over the Q2 level, the sequential growth indicating the momentum in the economy.

Having said that, there's no denying that ours is a three-speed economy. Comparing the first three quarters of 2003-04 with the first three quarters of 1996-97 (the first year for which quarterly data is available on the CSO's web site), we find that while agricultural output is now 1.16 times the FY 1997 level; manufacturing, electricity, construction and mining is now 1.4 times the 1996-97 level; but services output is now 1.7 times what it was in 1996-97.

Putting it another way, while agricultural growth has been 16.4 per cent over the seven years, industry has grown by 41.7 per cent, while services growth has been 74.4 per cent.

That gives a CAGR of 2.2 per cent for agriculture, 5.1 per cent for manufacturing and 8.3 per cent for services. More significantly, the services sector accounted for 65.9 per cent of the growth in the economy over the last seven years.

In sharp contrast, the agricultural sector was responsible for a mere 9.8 per cent of the growth, while 24.3 per cent of the improvement in the economy since FY1997 was on account of manufacturing growth.

This year's record agricultural growth is therefore far above trend, and was only possible because of the negative growth in agriculture last year.

While services have been the engine of growth for the economy, the trouble with this services-led growth model is that two-thirds of the population is still dependent on agriculture. But it's well-known that growth in agriculture has slowed down substantially, compared with the pre-liberalisation period.

Not so well-known is that the share of manufacturing in the economy is also coming down. The table shows that while the manufacturing sector was 18.2 per cent of GDP in 1996-97, it had declined to 17.1 per cent in 2003-04.

In fact, it had declined to 16.7 per cent in 1999-2000, after the downturn in the business cycle, and although it has recovered lost ground since then, manufacturing is still far less important than what it used to be. In 1990-91, manufacturing was 21.1 per cent of the GDP.

Services, on the other hand, clearly is our star sector. From constituting 39 per cent of GDP in 1990-91, it now constitutes 50.5 per cent of GDP.

Balance of payments

The balance of payments data for the September to December quarter show that the higher merchandise deficit during the quarter has been more than made up by a rise in exports of invisibles, with services exports rising by more than 80 per cent compared with the preceding quarter.

Software services exports rose almost 20 per cent compared with Q2, much higher than the 4.8 per cent sequential growth recorded during the previous quarter.

While merchandise imports should continue to increase, the trend towards higher service exports is sustainable and forms the basis for a continuing surplus in the current account.

As expected, portfolio flows into the country were much higher during the third quarter, with net inflows moving up by 92 per cent compared with Q2.

Inflows on account of NRI inflows went up in the third quarter, though they were still lower than the inflows recorded in Q1, before the lowering of interest rates on NRI deposits.

The overall balance on the capital account was however lower than in the previous quarter, thanks to higher outflows on account of loans. That should change in the fourth quarter, as external commercial borrowing guidelines were relaxed.

Over the nine months to end-December 2003, foreign portfolio investment remains the single largest source of accretion to forex reserves, with NRI deposits a distant second, followed by the current account surplus.

Increasingly, the fate of the Indian stock markets, the bond markets (with liquidity being the result of the RBI buying dollars) and the rupee is linked to FII inflows.