The Indian Economy Blog

September 29, 2006

India’s 2nd Quarter GDP

Filed under: Business,Growth — Edward @ 12:43 pm

Just following up briefly on this post on India’s industrial output, second quarter GDP results are now out. India grew at an annual rate of 8.9% between April and June, just down a touch from the 9.3% annual rate in the first quarter. This suggests that the economy is slowing slightly, but with higher energy costs and rising interest rates this is not surprising. Also the global economy is definitely slowing, so this downward movement may continue, although I wouldn’t anticipate anything dramatic. The future looks good.

India has maintained its position as the second-fastest growing major economy after China as rising consumer and government spending drove manufacturing output to a six-year high.

Asia’s fourth-largest economy expanded 8.9 percent in the three months to June 30 from a year earlier, after a 9.3 percent gain in the previous quarter, the Central Statistical Organisation said in a statement in New Delhi. The median forecast of 15 economists was for a gain of 8.4 percent.

Wal-Mart Stores Inc. and Carrefour SA, the world’s two largest retailers, are vying to set up in a nation of 1.1 billion people where retail sales are expected to more than double in the next decade as incomes rise. India is stepping up spending on ports, power and other infrastructure to attract more investment in factories and lift manufacturing to a quarter of the economy from the current 17 percent, half China’s level.

“Consumption and infrastructure spending are driving growth,” said Sundaresan Naganath, who manages the equivalent of $2.4 billion in Indian stocks and bonds as chief investment officer at DSP Merrill Lynch Fund Managers Ltd. in Mumbai. “If India is growing at 8 percent with poor infrastructure, then with great infrastructure it can even grow at 12 percent.”

24 Comments »

  1. Well! It seems the country has entered a new growth trajectory. However, can we sustain it? My worry is consumption lead growth may not help us in the long run.

    Comment by Vasudev P. Iyer — September 29, 2006 @ 9:35 pm

  2. Just curious to know how do we arrive at this 8.9 % figure or how accurate it is. Can we rely on statistics published by Indian Government? I don’t think even our census is accurate. Since most of the industries in India are fragmented and accounting/taxation reflects only portion of real activity, is there a formula to guesstimate this number? Could some of the growth be “uneconomic development” for example, haphazard construction without any town planning. GDP is a decent measure of economic health but there is lot of debate about GDP reflecting future growth and health of a economy or social infrastructure.

    Comment by Ashutosh — September 29, 2006 @ 11:45 pm

  3. pretty unblievable. So the RBI tightening is having no effect on industry? Would be interesting to see contribution of external sector on IP activity. I still think the FM is overly bullish on credit conditions. Bank credit is growing so fast, sector wide asset quality could be gravely at risk in the event of a sectoral or cyclical setback. Any one done any basic work on labor force participation and productivity growth rates here. Thanks,

    Aninda

    Comment by Aninda — September 30, 2006 @ 5:43 am

  4. yes the 8.9% GDP growth rate for AMJ-2006 is quite good and high!
    The numbers are pretty reliable : government bond trading and pricing which is quite large and active relies a lot on this. The profits declared and advance tax payments made by the corporates also reflect this. The export & import figures, the bank credit offtake figures all tie in with a 8% + growth estimate. In short they are as reliable as advance estimates of a macro-economic variable can be. Prior revisions in these quarterly numbers has also not been statistically significant

    With the growth being as robust, the end-users are not facing the pinch of increasing interest rate. The people who are feeling the pinch is the people who were leveraging to ‘invest’ in another asset eg. equities or real-estate. The volatility in the equity market, in conjunction with the increased costs have reduced the leverage positions significantly. The real-estate market has softened if not flattened out compared with the prior quarter. But the impact is not much as the mortgage-interest rates have gone up only from about 8% to 10% over 2 years, hence i feel it would take a much bigger rise in interest rates to have a slowdown on the investment/ capital expenditures of households and corporates. Government’s borrowing costs too have gone up because of this, however with their modest efforts to control the fiscal deficit; they are more concerned about the announcement on the 6th Pay commission rather than interest rates. This concern expressed by many chief ministers is in itself a good sign that they are thinking about fiscal responsibility sometimes atleast !

    The optimistic mood is quite high now especially with the decline in the crude prices and fears of global interest rate hikes receding. However how long can we grow at this rate when the infrastructure is not stepping up as adequately is an issue. I dont think there is too much slack in the system (railways – electricity – ports – domestic oil exploration) which can be tapped, and fresh capacity is increasingly the only way for meeting fresh/ increased demand

    Comment by envenkat — September 30, 2006 @ 11:26 am

  5. Hi Vashudev, Ashutosh and Aninda.

    “Just curious to know how do we arrive at this 8.9 % figure or how accurate it is. Can we rely on statistics published by Indian Government?”

    Well I’m inclined to take envenkat’s view on that. If anything the numbers are likely to be a significant underestimate given the size of the informal economy. People were pretty sceptical about the Chinese numbers at first. Then recently they had to make a 10% upward revision.

    Incidentally, I don’t know if anyone over here noticed this, but Greece is now trying to upwardly revise their GDP by 25% on exactly these grounds.

    Before they had reasons for underdeclaring to keep down their EU contributions and to receive subsidies, but now they want to make their deficit situation look more palatabe. Measurement errors sometimes cover a lot of sins.

    “My worry is consumption lead growth may not help us in the long run.”

    I agree to some extent. There is undue emphasis on this given the US current account deficit problems, what has been happening in China and worries about ‘global imbalances’.

    I think what we will see is investment demand now begin to take over the heavy lifting. Note what envenkat says:

    “However how long can we grow at this rate when the infrastructure is not stepping up as adequately is an issue. I dont think there is too much slack in the system (railways – electricity – ports – domestic oil exploration) which can be tapped,”

    So growth is not constrained by labour supply (except in the highly skilled sectors) or by capital supply, but infrastructure investment is needed, my feeling this will take up the slack as consumer demand weakens. This is much more realistic in India than it is in the US right now.

    “I still think the FM is overly bullish on credit conditions. Bank credit is growing so fast, sector wide asset quality could be gravely at risk in the event of a sectoral or cyclical setback.”

    Well look, I think we are now, as I said in an earlier post, entering ‘uncharted water’. Morgan Stanley’s Andy Xie once famously said about China ‘time to throw away the textbooks’. Not literally, but in terms of the fact that reality is outsripping our previous understanding. This phenomenon is so enormous, and we are talking about rapidly developing economies, so the language and gut reactions of developed world macro have their limitations.

    It is like there was a huge hydro-electric reservoir, and someone had opened the gates to let the water drop to turn the turbines. We will see how far this can now run, but my feeling is it can run quite a long way.

    Using the old language, there is certainly a lot of ‘pent up supply’ just waiting to come onstream.

    So what I am saying there is also pent up demand for infrastructure, and when the invesment push comes this should ease the cyclical component considerably. You may get some slowing next year, but I don’t imagine it will be anything dramatic. As envenkat says, and I have posted here, and Dave Altig seems to agree, global interest rates may now have turned in this cycle, which means that money should get cheaper, and if there is a global downturn energy should keep a much lower level, all good for India which isn’t so dependent on the global economy at this stage.

    “Any one done any basic work on labor force participation and productivity growth rates here.”

    Not yet, but these are the sorts of things we need to get into. Also the topic of the ‘growth corridor’ – ie the fact that this composite GDP rate hides a lot of inter-state variance. This is another interesting area which we ought to explore.

    Comment by Edward — September 30, 2006 @ 7:48 pm

  6. Incidentally Aninda,

    “Any one done any basic work on labor force participation and productivity growth rates here.”

    It is important to bear in mind that India’s population is still growing comparatively rapidly, much faster than, say, China’s. This means the GDP per capita growth in India is less.

    In the short run this is a headache for India, in the long run it may be an advantage, although putting a stop to all those children dying in the North is obviously a priority. My guess is growth can also run for longer in India. This century you will undoubtedly become the world’s number one economy, and possibly by 2050, which means all of you who are still young have a great future waiting for you out there if you know how to use it.

    If we look at the case of the UK in the 19th century, and the tigers, then TFP growth normally starts to take off some time after the initial growth spurt. In my opinion this is because individual productivity is at its best in the 30 to 50 age group. So you will see a lot of benefit as the people who are now in the 15 to 30 age range age a bit. Say 10 years from now.

    Of course, TFP is very variable across sectors, and I imagine India has some very productive sectors already. The thing is we still need data. We need a lot of these aggregates breaking down. India also produces some fine economists, so I don’t think we will have to wait too much longer before this starts happening. The rate of ‘economist production’ (the economist production function) seems to have a lot to do with culture. If you notice most of the good macroeconomists come from either the US, the Uk, Sweden, Israel, and (guess where) Catalonia (people like Xavier Sala i Martin). The rest of Europe doesn’t produce a lot. India it seems has ‘the gift’. Which will also be an interesting detail.

    The fact that Bloomberg now has a regional India page is simply a sign of the times (and of course they have Andy Mukherjee).

    Comment by Edward — October 1, 2006 @ 11:19 am

  7. Why the hype on the GDP growth alone? Why not on infant mortality, school enrolment ratio, poverty etc?

    Comment by Alex — October 1, 2006 @ 10:48 pm

  8. Alex,

    “Why the hype on the GDP growth alone? Why not on infant mortality, school enrolment ratio, poverty etc?”

    Well, in my own defence I would point to this:

    “In the short run this is a headache for India, in the long run it may be an advantage, although putting a stop to all those children dying in the North is obviously a priority.”

    But the essential answer is that raising GDP per capita is the only way you are going to get your hands on the resources to address all the other problems, that is why GDP is the key, not because the topics you mention don’t matter, of course they do.

    Comment by Edward — October 2, 2006 @ 12:28 pm

  9. Hi Edward and Envenkat,

    Thanks for your v.good insights. I had tuned off this topic for a bit, but am glad to see more traction around it.

    I guess where I’m coming from is the concern about growth sustainability. As such, the main risks to sustainability -at least from a policymakers standpoint- is not just, as Envenkat mentioned a function of lack of infrastructure, but also a question of composition.

    I do not argue that lack of infrastructure and spare capacity spells greater inflation risk. Although i certainly hope that the old Keynesian adage of incremental domestic demand will end up creating its own supply will come into play. The occurrence of such a trend is all the more likely given that the exposure of tradeable goods (not services, mind you) to the external sector is still comparatively small (as % of GDP), although growing rapidly from a small base. What this implies, is that reformers (& india’s woefully fractious political class) have a narrow window at best to act quickly to reform and enable more supply side capacity (am referring here to roads, ports, airports, electricity, etc.). Otherwise the whole manufacturing story is clearly put at risk. There is more to this risk than simply switching from consumption spending to investment spending in the aggregate economy. Especially is you believe that most of industry/manufacturing caters to domestic demand. If industry is tapping into global demand in big way, or expects to do so shortly, then the supply constraints become all the more tighter.

    Then there is the question of credit. Once again on the surface it is easy to say that the old theories/rules don’t apply. But do also keep in mind the current spell of credit growth, esp private sector credit growth, is the longest and highest, ever. Can it continue or not is also subject to several risks. Do you really think pvt sector credit growth can grow at more than twice the rate of nominal GDP? Moreover, bank credit to the pvt sector is already either at or may have even breached statutory limits (no more than 75% of lending of assets is to be lent to the pvt sector). Also, the stock of public debt stands at over 80% of GDP. Can the banking sector on the whole indefinitely continue financing such a high level of the public sector’s debt AND pickup the obligations of an increasingly indebted consumption class, is hugely questionable. Lastly, while on the topic of uncharted waters, I concede that such trends can hold their own for quite a while… but only so long as the growth is good. Also, bear in mind there are several instances of problems in such EMs as Korea or Taiwan with creidt card and real estate NPAs, not to mention SOE NPAs in China. Banks like ICICI can probably ride out such problems so long as their assets are doubling every few years, but when you got ppl handing out platinum cards on street corners or banks cold calling to offer you a great mortgage…one starts to wonder at the quality of such phenomenal asset growth.

    About Labor force and productivity. I agree 100% about the labor force story. Although, I remain concerned that the employment shift from agriculture to industry or services is simply not happening. Or not anywhere close to the degree it needs to happen. If industry and services are growing at 2times or 3times faster than agriculture, I certainly don’t see employment in such areas growing at an equivalent rate – relative to agriculture. So what happens to the unemployed and underemployed? At least some of these folks will be joining the naxalites and maoists or voting for kannada only schools.

    My intent is not to demean india’s growth story, or pooh pooh it. Everything you all have articulately argued/said are certaianly valid/laudable points. But I question its durability as there are several downside risks, that are not currently showing up in the headline numbers, nor, it seems, are the markets (or even policy makers?) fully cognizant of it.

    Thanks,

    Aninda

    About credit,

    Comment by Aninda — October 3, 2006 @ 2:03 am

  10. What a great place to start a business, any well conceived business! I can think of a dozen ideas right now. If only I was 20 years younger!

    Comment by Sarat — October 3, 2006 @ 5:12 am

  11. Hi Again Aninda,

    And thanks for the thoughts.

    What I am arguing here, in substance, is that we need a change of mindset. But this change of mindset doesn’t mean that all the old problems have gone away at a stroke of the magic wand.

    I am thinking more about the sort of debate that took place concerning the US economy in the 2nd half of the 1990s. Some people suggested at that time that the long boom would go on forever, and this was plainly absurd, the Nasdaq, as we all know, crashed. So you don’t simply abolish the business cycle.

    But there was a more subtle argument knocking about, and it came from Alan Greenspan, and it was that increasing productivity leveraged by a judicious use of the internet had raised the cruising speed of the US economy. This prognosis seems to some extent vindicated by the swift recovery of US growth post 2001, and the continuing vigour in the US economy.

    Now appreciations of all of this are very much coloured by silly political dogfights. I think we need to learn to be able to see the wood from the trees here. The US may well be going into recession next year, but this will not be a cataclysmic crash, since the underlying economy is fairly robust (notwithstanding some excesses in the housing sector, and the continuing CA deficit, a deficit which is, it should always be remembered, facilitating the rise of China as an important global economy). So there are *always* pluses and minuses to think about.

    Now contrast the US performance with that of Japan, and you will notice something interesting: while the US trajectory seems relatively sound (until of course the day that it isn’t, but this is some years in the future) Japan’s trajectory is inherently unstable, and there is a permanent danger of unwind.

    I would argue that demographic factors are very important to understanding why Japan is the way it is, and it seems to show us that the labour market participation growth which is associated with the demographic dividend my be symmetrically reflected in a ‘demographic penalty’ as the population subsequently ages.

    No what has all this got to do with India? Well what I am trying to say is that there are some paths which are inherently more stable than others, and IMHO India just opened the door to get onto one of those.

    This does not mean, as I am emphasising, that all the problems simply go away, but rather that they do become more manageable. So history is not simply an ‘eternal re-run of the same’.

    This is the important point to grasp. Now for specific issues:

    “the occurrence of such a trend is all the more likely given that the exposure of tradeable goods (not services, mind you) to the external sector is still comparatively small (as % of GDP), although growing rapidly from a small base.”

    This I think is the important point. This means that India can reasonably expect to weather any storm which may come in 2007/8 without too much core damage (this may not be *so* true of China).

    “What this implies, is that reformers (& india’s woefully fractious political class) have a narrow window at best to act quickly to reform and enable more supply side capacity (am referring here to roads, ports, airports, electricity, etc.).”

    I’m not sure why the window should be narrower, this infrastructural investment is clearly urgent, but it will be quite a long ongoing process.

    “Otherwise the whole manufacturing story is clearly put at risk. ”

    I’m not convinced of this, I think manufacturing is coming, although it is still largely downstream. After the next recession, during the following upturn, India will undoubtedly get more locked-in to the global economy. What I am not clear about at this stage is just how far India will go with manufacturing, and to what extent she will ‘leap-frog’ straight into services. The existence of China is likely to raise important problems about global manufacturing supply excesses, and hence put a downward pressure on prices which will affect profitability and hence investment decisions.

    “Also, bear in mind there are several instances of problems in such EMs as Korea or Taiwan with creidt card and real estate NPAs”

    Yep but remember that the ‘tigers’ are now in a different stage of their development process, they are starting to age, and are experiencing some of the problems we can identify in parts of Europe and Japan.

    “but when you got ppl handing out platinum cards on street corners or banks cold calling to offer you a great mortgage…one starts to wonder at the quality of such phenomenal asset growth.”

    Well I agree, and we could see the whole consumer lead growth story going for something of a nosedive. Some sectors of the housing market could crash (given the existence of what Greenspan politely calls ‘froth’), but my argument is that in India there are important investment needs which will to some extent take up the slack (remember demand is *aggregate* demand, an analytical point which is often blurred in many of today’s debates). This is much less the case in China, although it is precisely there that consumer demand might take off.

    “Do you really think pvt sector credit growth can grow at more than twice the rate of nominal GDP?”

    No. Insofar as we are talking about consumer credit this will in all probability ‘correct’.

    “Also, the stock of public debt stands at over 80% of GDP. ”

    The problem is that India is faced with having to attempt an enormous balancing act. There is the whole issue of poverty and education needs. My feeling is that the growth of public debt needs to be restrained (ie the balance needs to change) but this may be best resolved by checking expenditure and letting a rising GDP ‘sweat’ the proportion off, rather than going for straight cuts. This process also needs to be politically sustainable. OTOH there are surely many ways in which the money could be spent more efficiently.

    “Although, I remain concerned that the employment shift from agriculture to industry or services is simply not happening. Or not anywhere close to the degree it needs to happen.”

    Surely this is true, but give things a bit of time to happen. There are reasons to think it will.

    “My intent is not to demean india’s growth story, or pooh pooh it.”

    Surely. And my intent is not to idealise it, only to suggest that we need to be flexible in our thining, and adroit in our mental footwork so we can address new problems within adequate analytical frameworks.

    Comment by Edward — October 3, 2006 @ 2:24 pm

  12. Edward,
    Can’t materially disagree with any of the points you make above. My contention is more on the nuance/degree of the risks posed by several issues we have discussed.

    The point that does bear highlighting though is the issue of ‘mindset’. Yes, I agree inter-generationally, in India, there has been a sea change in mindest of the past 1/2 decade or so. But if you look at the indian press today, people are tripping over themselves to emphasize when/how india is going to become a ‘superpower’, also lots of india-china comparisons, and so on. The tone of such media/press analysis is usually self congratulatory, open ended …”Bombay will overtake Shanghai by 2020?” Its almost as if development or super-power status is pre-ordained or a ripening fruit that’ll be done just right in 10-15-30 years or so.

    From an investment standpoint, this leads to dangerous complacency about: valuations; blind trust in the “india growth story”; CA deficits don’t matter; and, a smug feeling that india’s private sector can see through almost any challenge. It is essentially not unlike the convergence trade of C/E Europe, where risk premiums dropped because of 2 words… “European Union.”

    From a policy standpoint, there is also an equally dangerous mindset of “growth will inherently, and by itself, solve most structural drawbacks”. So why risk one’s political skin by strenously pushing for substantial labor market or electricity reforms or privatizations?

    I do like the aspirational mindset of today’s average indian. A “can do” kind of an attitude. This is what Raghuram Rajan called India’s “Atma Vishwas” (beielf in one’s self). And this is also, as Tom Friedman, would say a unique function of geography, culture, political system, and -not least- technology. But still, economic history is not made by ‘mindset’ alone. Solid policy, planning, execution and deep/efficient markets are equally, if not more, important.

    Thanks,

    Aninda

    Comment by Aninda — October 3, 2006 @ 10:58 pm

  13. I get that Edward. :)

    Comment by Alex — October 4, 2006 @ 9:06 am

  14. I have a question about the demographic issues facing India. Most commentators on Indian economics have treated India’s fairly high population growth as a given boon, citing that a younger population is inherently more productive than an aging population. However I am unsure how high population growth, given India’s present allocation of labour would be a net benefit.

    India’s population growth is predominantly focused in two areas, the relatively impoverished North and the rural sector. I have read before that India’s population growth in cities, or lack thereof, is very similar to that of China’s and that the population bulge that is expected is going to come predominantly from the least productive elements (economically speaking) of Indian society.

    On a related note, the rate of urbanization in India, a key element in growing labour productivity, is anaemic. At least in comparison to China. I’ve poured over some of the Indian census figures and noted that for the years 1990-2000, the urban population as a percentage of the total only grew 2.4%. For China, the figure for the same time period was approximately 10%. I think this is reflected in the lower internal migration figures noted in one of the recent world bank reports.

    At present, India’s population is roughly 27% urban and 73% rural and within that rural population, a much greater percentage of the rural population is engaged in agricultural activity than compared to China (which has a 40/60 urban/rural ratio). This demographic region will likely witness the largest growth in population.

    Third, as I have read, India’s recent economic growth has mainly been a jobless growth. Employment figures have remained static despite impressive gains within the past few years.

    All of the above mentioned factors lead me to assume that ultimately India’s population growth will either be value neutral or a net negative. The growth is focused in areas which are the least economically productive and present trends in urbanization and India’s economic development are pointing in one direction, wage depression due to a coming glut in unskilled labour and an increased burden on India’s agricultural workers. Can anyone provide an explanation on how India’s youthful and growing population can be a benefit when it appears that at present, they are simply going to be any gains in productivity?

    Comment by Jing — October 5, 2006 @ 2:32 am

  15. hello jing,

    - one aspect of viewing the job-data, especially from india, is that the ‘organised’ sector employment ie. where data is easier to collect and analyse is only about 9%. It doesnot mean that the 91% are unemployable-or unemployed. Yes there is significant underemployment, and in many analysis unemployement as well. But in a society where there is no safety net/ social security system from the government, and the proportion of the wealthy is small in demographic terms, it is hard to not be ‘economically’ engaged. It means that there are a wide variety of things which people do on their own or in their households, hence are out of the purview of the data-net. for people in india it means they can and do find ways of making life easier

    - the job market is a bit harder to define as the education system (school level and university level) has been largely designed decades ago. hence the fit with the industry comes from ‘inhouse training’ or the more ubiquitous ‘on the job training’. many of the gaps have been identified and filled in by the private sector enterpreneurs eg. computer skills training in the 80s or the hospitality/ healthcare skills training of the 90s. the curriculum of such emerging needs getting incorporated into schools/ colleges takes a long time, eg. it is only now (in the last 5-8 years) that computer skills training courses is part of the mainstream education system. so the key issue is where are the skilled workers going to come from for say sectors like construction (where skilled people keep going off to middle east as the pay scales are better !) or textiles or food processing. these are the sectors which could absorb many people/ skills. i hope somebody has answers/ is thinking of the same

    currently there are many jobs being created in the ‘service sector’like couriers & delivery people, security gaurds, restaurants and shops, taxis etc.the youths relative comfort with newer things like using phones/ driving vehicles/ talking to people is all i think the skills they are using today. these kinds of jobs definitely are making life easier for the people who can afford to pay for them – as it is these set of peolpe who navigate the infrastructural shortages which are regular in india,and at a good price too. hence they are improving the productivity.

    the effect of higher skill sets of people who can compete on a national/ international basis is subsequent. as you would know only about 20% indian gdp is export oriented. i believe as the infrastructural constraints start getting addressed (some beginnings are there, though lot more needs to be done)then the entrepreneurial skills would be even better equipped to create jobs and capture the value in domestic and global markets. i feel the domestic market itself is underserved in many cases (eg. even now only about 2% of indian household assets are in equity/ capital market securitiesas per a recent RBI survey)

    Comment by envenkat — October 5, 2006 @ 6:15 pm

  16. Jing’s concerns are spot on. India’s rural/urban population ratio is indeed about 70+:30-. But the distribution of economic activity across agri:industry:services is about 18:28:56. So roughly, just over 2/3rds of the population is in a sector that accounts for less than 20% of India’s national income. If this is not a serious problem, I don’t know what is. Moreover, industry and services are growing at 10% to 12%, and agriculture is growing only at 3%-4%. So if industry and services keep growing at rates that are 3X to 4X that of agriculture, and such discrepancy in sectoral output in growth is not matched by at least the same rate of growth in employment (in industry and svc.s) then the vast majority of Indians will remain chronically poorer (in relative terms). Although I do not have handy stats right now, it is also important to keep in mind that the birth rate in rural india (esp in the impoverished northern states) is probably much higher than it is in urban, and especially southern India (or atleast that of middle-clas india).

    The writing is on the wall. This is ticking time bomb from a policy and political perspective. This is why BJP’s “india shining” fell flat on its face. This is something that Rahul and Sonia realize, and hence their populist stance of wooing the rural masses in UP is consistent with their overall long-term political ambitions. Unfortunately this is not on uppermost on the radar screens of india’s suave/urban classes, I am referring here to the maruti/hyundai driving, economic-times reading, bollywood loving, fashion crazy, english speaking, credit card using, tom-friedman quoting, club going, mall hopping crowd — whose world view is increasingly divorced from the structural on-the-ground harsh economic realities who’s impact is bound to be felt eventually through the ballot box.

    In India’s democracy the political advantage will lie with the economically disadvantaged, ‘cos they are more numerous and are growing in relative, and i wold argue even in absolute, size. Of course there are clerks, peons, electricians, plumbers, drivers, maid servants, construction workers, who are increasingly drawn from rural areas as urban india booms. But whether such migratory/employment shifts offset the natural growth of the agri sector’s population is highly questionable from an economic point of view, and could eventually end up posing far greater dangers from a political point of view.

    Aninda

    Comment by Aninda — October 5, 2006 @ 11:20 pm

  17. ”However I am unsure how high population growth, given India’s present allocation of labour would be a net benefit.”

    Envenkat’s points are interesting, however at this stage I would simply like to address the core issue Jing raises, population growth. Population growth in and of itself is neither intrinsically a good or a bad thing in economic terms. Maybe I should rephrase that, very high rates of population growth due to high fertility is almost certainly a bad thing.

    But this isn’t the issue. The issue is one of age structure, and how age structure changes. This is the important point. India is presently experiencing a quite favourable change in its age structure, while Japan is currently experiencing a quite unfovourable one. That I think is the key point about ’demographics’.

    This is also why population growth produced by immigration – as in the US, Spain or Ireland – is normally considered favourable, since the migrant population is largely a working age one. ie you get the workers without actually having to pay for producing them and bringing them up.

    On this score noone should miss Ben Bernanke’s latest speech about the demographic transition in the US.

    Comment by Edward — October 5, 2006 @ 11:30 pm

  18. Ok this just got interesting, since Aninda posted while I was writing a reply to Jing.

    “Although I do not have handy stats right now, it is also important to keep in mind that the birth rate in rural india (esp in the impoverished northern states) is probably much higher than it is in urban, and especially southern India (or atleast that of middle-clas india).”

    This is very much to the point. I have a post on this here. P.N. Mari Bhat provides the data. So what we have, at its simplest is not one, but two Indias (and probably ‘many Indias’ depending how far you want to drill down on detail).

    “So roughly, just over 2/3rds of the population is in a sector that accounts for less than 20% of India’s national income. If this is not a serious problem, I don’t know what is. Moreover, industry and services are growing at 10% to 12%, and agriculture is growing only at 3%-4%. So if industry and services keep growing at rates that are 3X to 4X that of agriculture, and such discrepancy in sectoral output in growth is not matched by at least the same rate of growth in employment (in industry and svc.s) then the vast majority of Indians will remain chronically poorer (in relative terms).”

    I absolutely agree. This is why the productive sectors of the Indian economy need to grow at a considerable rate, and at a rate which creates a high volume of employment. In the US they talk about the ‘stall speed’. Stalling speed of the US economy may be around 3% if they are to absorb all the young workers they have coming online. Stalling speed in India is a much faster rate of growth, for the reasons Aninda mentions. This is a bicycle that needs to keep moving fast to stay upright.

    On the agriculture vs the rest issue, the only answer I see is substantial rural/urban, and North/South migration. This has happened in China, and they have absorbed a 200 million or so reserve army in five years, so it is doable, but it is hard work.

    And if it isn’t done, as Aninda indicates, then all the political arithmetic unwinds. That is why reform is an urgent, and not a secondary, matter.

    On the general issue of ‘many Indias’ I continue to maintain that there is an urgent need to break down these aggregate growth numbers so we can see just what is actually happening, and where.

    Comment by Edward — October 5, 2006 @ 11:50 pm

  19. Envenkat

    “But in a society where there is no safety net/ social security system from the government, and the proportion of the wealthy is small in demographic terms, it is hard to not be ‘economically’ engaged. It means that there are a wide variety of things which people do on their own or in their households, hence are out of the purview of the data-net. for people in india it means they can and do find ways of making life easier”

    Yes, and this is one of the reasons why ‘real’ GDP may well be significantly higher than the official number.

    “currently there are many jobs being created in the ’service sector’like couriers & delivery people, security gaurds, restaurants and shops, taxis etc.the youths relative comfort with newer things like using phones/ driving vehicles/ talking to people is all i think the skills they are using today.”

    Good point, and the importance of this should not be underestimated. That is why there will be a services as well as a manufacturing story.

    “so the key issue is where are the skilled workers going to come from for say sectors like construction”

    Yep, this is the heart of the matter, and for manufacturing, of course. This is why education and training is a vital national priority.

    Comment by Edward — October 6, 2006 @ 12:00 am

  20. “On the agriculture vs the rest issue, the only answer I see is substantial rural/urban, and North/South migration. This has happened in China, and they have absorbed a 200 million or so reserve army in five years, so it is doable, but it is hard work.”

    Indeed it is hardwork. The impact of migration on a Chinese scale is, under current conditions, too much for Indian cities to bear. For instance, Mumbai and Bangalore are already saturated and gridlocked beyond belief. Recently announced plans to enhance mass transit (underground trains) and new housing (such as in navi/new bombay) won’t materialize until 2010 or so, and even then the capacity enhancements will be enough for alleviating the currently over-burdened transportation systems and maybe meet some of the natural growth in population, but hardly enough to meet a net migration into these cities on a Chinese scale. Housing too is unaffordable, and have already led to 40-50% of Mumbai’s population living in slums. Navi Mumbai development and all will help but under current trends, it will be enough to offset existing pressures but not meet net new jumps in migration. The same story is repeatable in city after city after city in India. Ofcourse if the investment ratio jumps up by +10% of GDP in the next few years, from the current 25-27% of GDP or so, then the infrastructure/building boom could be gargantuan. But whether or not such S/I trends are possible or not, depend critically on the state of public finances in the next few years.

    -Aninda

    Comment by Aninda — October 6, 2006 @ 12:36 am

  21. i think Carrefour is frm France and not SA

    Comment by Kholu — October 11, 2006 @ 12:00 pm

  22. The above blogging seems to be quite knowedgeable. I have just started reading economics and what i have to study currently is the effect of economy on the construction industry. I would appreciate any help on this topic. If possible do e-mail me back on shalu_mn@yahoo.com

    Comment by shalu_mn — October 14, 2006 @ 9:07 pm

  23. as our record say that we r on 8.9%gdp rate, i want to know how u calculated that. what is the process of determining that.

    Comment by gaurav — October 26, 2006 @ 12:36 pm

  24. Individual Income is calulated with a simple formula: Y = C + T + S
    where, Y is Income, C is consumption, T is Taxes and S is Savings.

    In other words, if you tell me what is your monthly expenses, how much tax you have paid and what were you able to save, I will be able to tell you how much you earned.

    The same thing can be applied for calculating income of the nation. The GDP (national income) Y = C + I + G + X – M where, C is consumption, I is investment, G is government budget, X is exports and M is imports. http://mindtools.net/GlobCourse/formula.shtml

    National Income = Sum of individual incomes = GDP
    (C + I + G + X – M) = (C + T + S) = Y
    (I – S) + (G – T) + (X – M) = Y
    Monetary Policy + Fiscal Policy + Trade Policy = Economy

    India’s overall GDP is more or less accurate. India gives clear break-up of Investments (gross capital formation), Savings, Budget numbers and Foreign trade numbers. These economic stats can be found in websites of RBI(www.rbi.org.in), Finance Ministry (finmin.nic.in) and Ministry of Statistics (mospi.nic.in)

    However, there is ambiguity in GDP numbers published for each economic activity as it involves some estimation. The directorate of economics and statistics has come up with a new methodology for calculating GDP numbers by economic activity at a district level, which will be consolidated at the State level and finally at the national level. http://mospi.nic.in/methoddp_30july04.pdf

    Hope this info is useful for all those who are wondering how GDP is calculated.

    Comment by Indian Economist — November 18, 2006 @ 11:19 pm

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