Unsustainable import competition and the end of the investment subsidy that the sale of under-priced resources provided to Indian companies are the main reasons why the economy has slowed down
What has been called the ‘golden age’ of India’s economic growth was underpinned by global integration, high rates of investment and savings growth and low current account deficits. The slowdown is characterised by a sharp deceleration in investment growth on the demand side and in agriculture, manufacturing and construction on the supply side, alongside high and unprecedented current account deficits.
The government’s argument that this is the result of the global economic slowdown and related uncertainty is only partly true. The deeper reason, which the government is either unwilling or unable to come to grips with, is the unravelling of the underlying growth model — partly due to structural change engendered by globalisation and partly because the investment subsidy implicit in under-pricing assets is no longer feasible.
Imports
The speed and depth of global integration accelerated sharply in the first decade of the 21st century. The average international trade (exports+imports) ratio which for the period 1992/3-94/95 stood at 19 per cent rose to 27 per cent by 2000/01-02/03. However by 2008/9-2010/11 this ratio had shot up to 48 per cent. But in this phase of rapid integration import elasticities — of both total imports as well as non-oil imports — have more than doubled. As a result, even as GDP growth has decelerated, goods export growth has slowed faster than both total goods import and non-oil import growth, resulting in a widening current account deficit, given that service sector exports growth dropped off as well.
This increasing import dependence has affected the three major sectors asymmetrically because their integration into the global economy is very different. Manufacturing is the economy’s most integrated sector, with an average trade ratio for the period 2008/9-2010/11 of 180 per cent. For agriculture and services this stood at less than 20 per cent. Even if we consider the sub-sector ‘financial and business services’, its trade ratio was only 58 per cent . For manufacturing, both the pace and nature of its integration changed significantly in the first decade of the 21st century.
The manufacturing sector’s trade ratio in 1994/95 was 92 per cent. By 2000/01-2002/03 the ratio had risen to 112 per cent with the import ratio slightly higher than exports. This increase pales into insignificance as compared with that of the next decade when the average manufacturing trade ratio had risen to 180 per cent, with export and import ratios at 68 and 112 per cent. Therefore not only has integration increased sharply for the manufacturing sector but it has also been asymmetric — import penetration has almost doubled whereas export integration has increased by 20 per cent.
Of the three sectors, however, manufacturing is the only one that runs a trade deficit. The deficit is substantial, the average for the period 2008/09-2010/11amounting to 44 per cent of manufacturing GDP and rising — the average was only 9 per cent for the period 2000/01-2002/03. Little wonder then that, in the face of continuing import competition, manufacturing growth has witnessed a sustained slowdown. And, as one would therefore expect, capacity utilisation has declined significantly, well off its third-quarter 2009/10 peak, as Reserve Bank of India surveys indicate.
Investment growth
One of the more remarkable aspects of the ‘golden age’ was that demand growth was investment-led, both in absolute and relative terms. In constant terms, over the period 2003/4-2007/8 gross investment grew at 17 per cent per annum, more than twice the rate of private consumption expenditure. What is historically unprecedented was that gross investment accounted for more than 50 per cent of demand growth at the margin. If the high growth phase was investment-led, so is the slowdown. Investment (gross) growth slowed down to 10 per cent p.a. for the period 2009/10-2011/12. The slowdown in fixed investment was even sharper, to 7 per cent p.a. over the same period, less than 50 per cent of that in the high-growth phase. The depth of the deceleration is brought home by the fact that in 2011/12 gross and fixed investment grew only at 5.8 and 5.6 per cent respectively. And, more worryingly, consumption has decelerated much less and, as a result, over the last couple of years, it has grown faster than investment, resulting in the decline of the critical investment-to-consumption ratio.
Some part of investment slowdown surely has to do with the asymmetric increase in the integration of the manufacturing sector where import levels have increased five times faster than export levels. In other words, manufacturing growth has become very import dependent. The adverse effects of this dependence have become apparent with the global slowdown. Increased import competition now slows down sales growth of domestic firms, reduces capacity utilisation, puts pressure on margins and adversely affects expected profitability of the sector. The pressure on expected profitability affects investment in manufacturing. This in turn drags down overall investment growth given the under-appreciated fact that the sector accounts for the largest proportion of investment in the economy.
Under-priced assets
If the nature and pattern of integration has affected investment growth, Keynesian ‘animal spirits’ have been dampened due to a factor quite unrelated to globalisation.
During both the NDA and UPA-I regimes, an important driver of investment growth has been access to undervalued assets, whether those of the public sector, mineral and forest resources, land or the ability to influence the allocation of scarce spectrum resources. During the NDA regime, privatisation of public sector assets at fire sale prices stalled in the face of widespread political and social opposition. With privatisation off table, the UPA-I chose to use all other modes listed above to ensure that animal spirits were kept in ruddy health. The investment boom of the ‘golden age’, which roughly coincides with the UPA-I term, therefore, was primed by access to a wide variety of undervalued assets, ranging from land (SEZs, PPP infrastructure, etc.) to spectrum.
In UPA-II, however, this dynamic has largely run aground, hemmed in by protests from below and corruption scandals. Widespread and sustained protest against the public acquisition of land for private purposes — Singur, Nandigram, POSCO, Jaitapur, just to name an iconic few — has made it a political hot potato which is to be re-legislated and at least for the moment is off-limits. The implementation of the Forest Rights Act (FRA) and introduction of new legislation to govern the distribution of benefits from mining suggests that mining leases may not be as easy to get nor as lucrative as earlier. Add to this the Niira Radia revelations, the 2G scandal, the Anna Hazare movement, the CAG’s observations and Supreme Court rulings and it is not easy (at least as of the moment) to use elite access to influence the underpricing of assets. Therefore, all mechanisms used during UPA-I to under-price assets and give animal spirits a sufficiently conducive environment have become infructuous, being caught up in unintended political economy consequences.
Finally, there is one other aspect of the slowdown that has had an impact on market growth, expected profitability and investment. Construction is one of the three sectors that has borne the brunt of the slowdown. As we know from the last large sample survey of the NSS, over this phase of jobless growth, the two sectors that did produce jobs were construction and business services. The slowdown in construction will therefore have had consequences for employment growth, slowing down domestic demand growth just when external markets have dried up, again adversely affecting expected profitability and investment.
The nub, therefore, is that the investment-led growth model of the ‘golden age’ has come undone and like Humpty Dumpty, the PM’s men and women cannot put it back together again. The undoing is only partly the result of the global financial crises and the related slowdown. There are two other important reasons which the government does not talk about: globalisation has led to unsustainable import competition in the manufacturing sector, leading to a slowdown in manufacturing growth and hence in investment; second, the investment subsidy implicit in the under-pricing of assets in high demand is no longer feasible due to political economy reasons. As C.P. Chandrasekhar has articulated in earlier columns, it is of course possible to chart an alternate path and revive growth and investment. For that we would need to stop genuflecting before the fallen gods of finance capital. But that was too much to expect of the former finance minister or of the incumbent. There is, then, little else to do but to wait for the monsoons, capricious foreign investment or other such manna from heaven.
(The author teaches economics at IIM Calcutta. Email: mritiunjoy@gmail.com)
India simply cannot expect to pay its bills with FDI. It needs to export more than it imports by making quality products.
The article and Mr. Rajaram's comments are high caliber and on the mark. UPA has wasted
a golden opportunity presented by people's mandate to govern. They or whoever comes next
have to have the "common man and woman and child" as the focal point of all their planning
and resource allocation. The centralized Planning Commission should be disbanded and
local governments should be empowered. I recall PM Charan Singh's small attempt in his
short tenure to have management graduates work at the Panchayat Level to help them with
grass-roots planning and implementation. There are a few brave young souls from the IAS
and MBA who try to do this on their own but they need institutional support.
This is a great article from Prof. Mohanty. Great to see such articles
on the Hindu. Also shows why IIM Calcutta is known as the best institute
in the country for Finance and Economics!
When bulk of the people in the country do not even have money to purchase absolutely minimum requirement of food grains and other items of household consumption, how will manufacturing industry grow unless those who have disposable income do crazy things like buying new cars and houses every year, provide a refrigerator,TV set, and a computers in every room in their homes etc.Will our economists explain to the people of this country how economy can grow continuously at high rate without simultaneously creating growing number of jobs which pay adequately? Let them talk about growth in real,repeat real, household income which is of course not average household income and not about economic growth rate which is just a number without real life significance.
The increase in imports in not always bad. Temporarily, imports appear to be excessive of exports. But imports of equipments, machinery and raw materials add to the productivity and increase exports and reduce the trade gap, subsequently. The foreign investment is reduced because of the general foreign perception that India is not prime for foreign investment because of rules, regulations, taxes, delays, lack of infra-structure, corruption, bureaucracy, scandals, nepotism and politics. The governments indulge in everbody's affairs and all affairs. Enormous amounts of money is wasted in government investments in social, cultural, sports, tourism , welfare programs and subsidies, while the governments failed to provide the basic necessities such as electricity, cooking gas, drinking water, food, roads and infra-structure. After 60 years of planning and five year plans, the GDP of India remains the GDP of the cities where the professionals and techies live.
It is better to have low growth or no growth rather than assymeteric growth powered by loot of public assets or what the author calls in scholarly terms "access to undervalued assets, whether those of the public sector, mineral and forest resources, land or the ability to influence the allocation of scarce spectrum resources."
Even if there is zero growth at least the public assets would be saved for future generations!
Mritiunjoy Mohanty's article was brilliant. The new point it has brought up is indeed interesting and telling, indeed ! It clearly elicits the well known thing - GDP growth of India in last two decades was fuelled by Corruption itself in an institutionalized
form.
Middle classes of India - who whine too much about corruption and brag too much bout GDP growth - please have a look at this article.
By bringing more such original and bold analyses The Hindu will attract larger and larger number of readers .
Mryuonjay said the plainest truth. Love his simple yet penetrating analysis. But we love jargon and are trapped. No one will come to help India. No one has extra cash. Recession is taking its toll. Living standards world-over are falling. They are building one-room tenements in New York.
It has come to survival. I'd love it if Mrytonjay addresses the issue from a "Swadeshi" perspective. Is talking about "Swadeshi" weird ? What about water-supply and electricity ? GOI can invest hugely in improving infrastructure (roads, replacing water lines, drainage, electricity). That would need almost a trillion dollars (given India's size). It would keep Indian hands busy busy for atleast 10 years.
What after that ? This "saturation" point has to be faced. If not now, after 10 yrs. Growth has to be evenly paced. We have our "human resources" as our only exportable commodity. Will it come to send unemployed Indians worldwide to work as indentured labor ?
MMS hands tied by Mamata.
This is obviously an important article and we are grateful for it. Hopefully we will see more of
such in depth analysis. But the use of technical terms which only economists can understand
limits our appreciation. The editorial staff must do better job of ensuring simplicity and also
readability.
We need to appreciate certain basic simple facts. A nation’s economic activity is a function of the people. Its efficiency depends on their knowledge and skills. In both these counts India is at the bottom of the league of nations. Creating an economic growth based on selling natural resources can only have a very limited life span as we have already seen. Even the Gulf States blessed with natural resources of oil and gas knows that their economy needs to diversify as their natural resources are finite. India is strong only in the fields if IT and Pharmaceuticals. Even in these sectors we cannot claim as innovators. We are good in making quality products in these sectors and hence compete globally. In any other fields India cannot make products with world class quality. The article points out the high import of goods and also the difficulty of Indian companies to sell their products thus discouraging investment. If Indian companies cannot make products comparable in quality to the imported, people will not buy them. The investor will not make sufficient profit and investment dries up. It is as simple as that. China succeeded not that China sold their cheap labour to the world; it was because they could make things competitively to the high specifications required by other countries. The Chinese have the skill to do that. Until India start focussing on education, skill and apprenticeships the population will remain unproductive. In such a climate investment from within and without will dry up. In order to invest in improving the human resource India needs to formulate policies and implement them with vigour. The amount wasted in the 2G scam and in the import of defence equipments in the last ten years should have been enough to address the above deficiency and improve infrastructure thus turning India to the economic tiger it dreams of. The waste of billions in arms import is ridiculous as anybody with some basic knowledge should know that all imported products would become obsolete within 5 years as the technology moves on. A nuclear power like India should acquire enough indigenous technology to make the products necessary for its defence. Here again the weakness of manufacturing sector and innovation is the impediment.
Excellent analysis by tying togather various facts.Its very scary to
see that manufacturing industry is running with 180/100 imports to
exports.Even agriculture is at 120/100,We need to have good politicians
not congress not bjp, If we have to Change India the only way is to
change our vote.Pick a non UPA, non NDA and good politician then vote
for that person.Atleast with dwindling vote count these traditional
parties will reset their mode of working.Change vote change India.
our economy is in deep trouble as it is reflecting from decreasing GDP
growth.we need to look it at very seriously because other countries
with whom India is compared (BRICS) are growing much better pace
compare to India.our agriculture share of GDP has gone drastically
down.First we need to push it up because agriculture is attached to
64% of the country.Then we need to focus on infrastructure,.It will
help in improving other sectors also.It is one sector which,is still
to see day's light in terms of growth and investment.if our production
is so high it is increasing every year ,we actually need to think how
can this increase production help in our economy.we also need to focus
on supply side constrains which interns reduce the demand generation
and ultimately creates a big deficit.
Interesting article. At the same time, the article seems to completely miss out on the critical role which could have been played by the Reserve Bank of India in stabilizing the economic cycle and moderating output volatility. Indeed, most writing on the Indian economy place all blame on the Government only and completely ignore the critical role of the central bank in a modern economy. Low and stable inflation is the most critical and only contribution the central bank can make to supporting economic growth in any country. By a broad economic measure(GDP deflator),prices have increased at 12%+ pa in India in the past decade. High, rising and volatile inflation can seriously undermine investment confidence and result in over / under investment in different phases of the economic cycle. High nominal income growth on account of high inflation and a managed currency exchange rate can also result in large trade / current account deficits.RBI has much to answer for the economy's troubles.
A can of worms has just been thrown open for the UPA ,by the author with this article .Its a damning indictment of this Govt . Its true , what we are seeing now- the slow down of the Indian economy and drop in GDP growth ,is only partly due to the global economic slowdown . The real reasons, the author has rightly and aptly pointed out in this article . Taking a cue from here , its high time ,the Indian media -like THE HINDU, delves deeper and brings out articles with indepth analysis on "THE STORY OF THE RISE & FALL OF THE INDIAN GDP ".
In India, we don't see ourselves as the drivers of our own destiny. We
are always cursing poor monsoons or global competition for our own
collective incompetence. It seems we are happy to give up as soon as we
can find one lame excuse.
The analysis is superficial because:
a) it stops at saying Indian manufacturing couldn't stand up to global
(read Chinese) competition. Not a word about what could have been done
and wasn't done.
b) production requires many inputs. To argue that growth ground to a
halt just because (artificially) cheap land is exhausted is
ludicrous. So, India prices itself out of global competition as soon
as land/spectrum etc need to be priced more realistically given their
finite supply? How are the other countries doing it? What about that
other under-priced resource that India has plenty of and should be
leveraging -- the cheap labor. Or, is it that we know our labor is no
longer cheap once we account for low productivity and want to do
nothing about it?
Part3:
In fact The 'RISING INDIA' story cooked and vended out by the UPA Govt, its Corporate affiliates and select Journalist Groups was nothing but a well planned cover-up for the wholesale looting of the national resources that's been going on in the name of Economic Liberalisation and show of high GDP growth, that was ultimately benefitting only a few .Rising discontent and the crime rates across the country was being ignored. Its time now the Indian media and we all need to further ask ourselves ,is it prudent “driving GDP growth for sake of statistics while ignoring the state and health of the Indian society in general?.
China sold its abundant labor force cheaply to MNCs to script a growth story. India sold its scarce natural resources cheaply to compete and once it became difficult to do that, the growth ceased. Thank you, Mr. Mohanti and The Hindu for telling the true story behind India's short-lived growth story.
Part 2:
The prevailng high inflation that the Govt is unable to control is also partly due to corruption and the black economy, cannot be ruled out .In just five years from 2004-08 alone, according to the GFI report , the country also lost roughly Rs.4.3 lakh crores of national wealth to outflows to tax havens.Certain media in the country has already reported that part of this money is returning into the country in the form Promissory Notes for investment into the stock exchanges and real estate market and is again proof of the link between the GDP growth achieved by this Govt , corruption and the black money generation . This also explains why the Govt has not shown political will to curb corruption through a strong Lokpal bill , nor followed through on the black money trail . Using such means to achieve GDP growth , with such dire consequences for the country , it is not a a great achievement for this Govt to claim a 'rising India'or 'India shining' story under its governance .
PART 1:The author has hit the nail on its head . This was a point being missed by the media . Or was it deliberately missed by the media ??This Govt has managed to show high GDP growth that is benefiting only a part of the Indian society by overlooking rampant corruption and undermining many of the democratic institutions in the country ,upto the office of the CVC. The cost the Indian society is paying and will pay in the years to come , for the rampant corruption ignored by this Govt 'cannot be calculated in monetary terms but it will be significant', say many . That this govenment does not want to tackle black money also stems from the fact that India's 'growth' story or the UPAS claim to annual 8-9% GDP growth of past 7-8 years is riding high on the back of rampant corruption . That most of the scams involving astronomical sums have been committed mainly in the past 7 -8years substantiates that statement .
This topic needs greater in depth coverage and debate across the country .The Indian growth story that the UPA had been trumpeting , had been reliant on corruption, and they knew that reining this in will also rein in the extravagant growth that had become so necessary not just for the survival of the government but for the self-image of the country's elites. This dilemma - the government knew very well but was not explicitly recognised in the media then .
Hundreds of billions of rupees were extracted in various ways to drive the GDP growth : through government spending on mega-projects or big events (such as theCWG ); through often illegal and inadequately compensated expropriation of land to benefit large private players (for industries and real estate projects); through the gratuitous takeover and handing to favoured parties resources ranging from water and minerals to spectrum .
In sept last year i had written:"Truly the GDP growth trumpeted by this Govt is not in the nations' long term interest , but a coverup for the brazen loot of the nation . I would request journalists like Sainath and similiar well meaning journalists in the country to make it feasible for such headlines to appear in the media : “WHAT GROWTH IS INDIA TALKING ABOUT AND WHO BENEFITS FROM THIS KIND OF GDP GROWTH ?”, so that it becomes a topic of national debate soon."
Am glad now atleast that debate has begun .The "India Rising " story , many intellectuals , writers and economists had termed it as a publicity campaign , with deception at its heart . Now the cookie has started crumbling and the truth is emerging . The prime driving force of the so called " GDP GROWTH STORY " , was corruption - i.e sale of national resources at undervalued prices to the "well connected " .
I agree with Rajaram's comment above. IT has only impoverished the town and
village as people have to pay the high prices in small towns, affordable to the big city
earners. My travel to small towns showed people skinny, malnourished as city
dwellers would have summer homes there and drive real estate, rent and food prices
way over the depressed wage scales in these small towns. Max. salary is Rs 5000 per
person compared to Rs50,000 in big cities and shop earners want to sell at the high
city price, starving their own people! In the Hills army officers dine in fancy
restaurants at Rs500+per meal at our taxpayer's expense and army cadre expend
energy wastefully on exercises when they could help build mud and brick homes for
our struggling villagers. We who are better off feel guilt and remorse at this state of
affairs. Growth should include overall happiness index (as Japan is too late now
attending to) If we can get out of nuclear clutches, we could easily ride on Germany's
Energy Wave
Reading this article compelled me to say..."you just don't read The
Hindu, you study it".
Government must have a serious concern and commitment to develop country's agriculture in totality i.e production, processing and export. Besides developing irrigation potential, the Production to marketing of farm inputs viz. seeds, fertilizers, pesticides, fuel,farm equipment and machinery would phenomenally add to investment and growth. Additionally non-farm sector in all its aspects should be developed to add value to the rural economy.In this process, growth would surely be achieved besides reducing poverty and unemployment in rural areas. In a planned manner subsidy in farm sector must be removed and enabling environment must be created including infrastructure that can stimulate farmers to enhance farm and non-farm productivity, increase return on investment. Country can learn much from Israel, Japan, Brazil and USA.
I liked the analysis. To a small extent it negates the view that the quality of faculty in teaching institutions in India has declined.
The article by Mritiunjoy Mohanty is highly appreciated.It shows govt's inability to tackle the financial crisis...but here is a problem.govt can revive their economic model when govt has time.they are not worried about economy, they have other important issues like presidential election,nomination of VP for election,corruption and so on...Even what our honorable PM Manmohan singh knows about economy is to increase the tax burden on the people to revive it.It is sad but true....A common man does not have to do with the economic model,they need basic amenities at the affordable price..Govt shows inhumanity toward these people,they are blaming EU crisis for all these downfalls..If all other countries are responsible for downfall,then for what our govt. is responsible?What steps you have taken to tackle these challenges?
India's growth beginning in the 90s was an accident of history-- sudden release of human energy kept down by the permit-license raj accompanied by global demand for services. It grew on a shallow base of software and services that has now reached a saturation point. This benefitted only a small urban elite leaving the rest, especially the rural areas untouched.
For growth to resume, greater attention should be paid to infrastructure, particularly energy and water which are related. Fortunately, solar energy has reached the point when it can be exploited on a large scale. It is a damning indictment of governments, the Planning Commission in particular that after 60 years of planning, even the national capital Delhi is literally gasping for water and electricity.
Solar power and water recycling should be the highest priority areas, not ivory tower planning. The model for this are the rural based Green and White (milk) Revolution, not the defunct Soviet Union's central planning.
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