BackThe lopsided economy
A small portion of the economy is responsible for most of the growth, which means growth is unbalanced and needs to be corrected
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What does the latest report card on the economy show? At gross domestic product (GDP) growth of 4.7% for 2013-14, it’s chugging along at the bottom for the past couple of years. But look a little more closely and the numbers show the completely lopsided nature of the economy. The financing, insurance, real estate and business services sector was the biggest driver of growth during the year, accounting for more than half the growth in GDP. Looked at another way, if we leave out this sector, then growth in the rest of the economy has been a mere 2.8%.
The next biggest contributor to growth was the trade, hotels, transport and communication sector, which accounted for slightly more than a sixth of the growth. The contribution of the industrial sector was negligible (see chart).
Has there been any change of trend in the March quarter? The recession in the manufacturing sector has worsened. The contribution of the financial sector to GDP growth did fall slightly and that of the trade sector went up a bit. But the big changes in the March quarter were the increased importance of agriculture and the fall in the contribution of the community, social and personal services.
Indeed, if we leave out farming, growth in the rest of the economy in the fourth quarter of 2013-14 falls to 4.3%.
In the social sector, the compression of government expenditure brought down its contribution.
Of course, the GDP data for March is history and, after the general elections, policy changes are expected to drive growth. What then is the significance of these trends? The obvious one is that a small portion of the economy is responsible for most of the growth, which means growth is unbalanced and needs to be corrected.
The financing, insurance, real estate and business services sector has proved to be remarkably resilient, managin
Construction, which has traditionally been a big employer of unskilled labour, has seen less than 1% growth in the past two quarters. To be sure, agricultural growth would have mitigated the unemployment problem in the last fiscal year. But then, if the El Nino fears come true, growth will be much lower, simply because the higher-than-usual growth in agriculture during the March quarter won’t be repeated. Also, the need to bring down the government’s fiscal deficit will mean lower demand in the future. Looking at the GDP numbers from the expenditure side, we find almost two-thirds of the growth in the March quarter, after adjusting for discrepancies, comes from private consumption expenditure. Although the expenditure side data is admittedly dodgy, the trend in consumption growth is likely the reflection of higher growth in agriculture as well as the effect of spending on elections. Slower inflation too should have helped consumption growth.
As a percentage of GDP, gross fixed capital formation in the March quarter fell to 31.2%, the lowest level in the March quarter since 2008-09, when the Lehman bust happened. On an annual basis, gross fixed capital formation as a percentage of GDP was 32.3% in 2013-14. But this is still higher than 31.8% seen in 2006-07, when the economy was well into the last boom. That this level of capex has not translated into output growth is an indication of the amount of capital stuck in half-completed projects and underlines once again the immediate need to complete them.
The GDP numbers, via the GDP deflator, also give a good idea about the inflationary trends in the economy.
Inflation computed using the GDP deflator has come down rather dramatically in the March quarter (see chart from Gaurav Kapur, senior economist at RBS). The fall in inflation in the agricultural sector was expected. More interesting is the lower inflation in the services sector. Clearly, the slowdown in services growth is finally affecting pricing power in that sector.
The lower inflation according to the GDP deflator, especially the sharp fall in inflation in services, combined with the dismal growth numbers, will comfort the RBI in its fight against inflation, although it’s likely to wait and watch and not make any changes in its policy rate in its statement this week.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com.
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