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Betting On Industry
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However, instability from month to month is quite familiar to the index. If we take somewhat longer trends, it would seem that growth has risen from the low levels of 5-6 per cent seen in 2008; the current level may be in the region of 10 per cent. Averages over even longer periods suggest growth at 8 or 9 per cent. So it is likely that the low growth in some recent months does not signify a change in trend, and that industry is growing in the long run at about the same rate as the rate of gross domestic product.
Such a rate may not seem high, especially in comparison with China, which has consistently achieved rates over 12 per cent and is on the way to becoming the world's largest industrial producer. But it is still a change from the long period beginning in the 1990s when services grew consistently faster than industry.
India seemed prematurely destined to become a country dominated by services, just like old industrial nations. In their case, however, the rise of services was the consequence of a change in the consumption patterns of their people; as their hunger for consumer goods got satiated, they turned to luxurious services such as eating out, tourism and entertainment. These were hardly the services India was turning to.
The primary reason for the rise of services here was the advance of information technology, primarily for export. For the rest, services in this country meant distribution, especially small retail shops — nothing much to boast of.
Whether India is turning into a country of servants or not is best settled by looking at GDP figures. They show a continuing rise in the share of services; if construction is included in them, their share increased from 62.2 per cent in the last quarter of 2008 to 68 per cent in the third quarter of 2010, the last quarter for which figures have been published. This is a significant increase. But for once, it has not been at the expense of industry, which increased its share from 14.6 to 15.2 per cent. It is agriculture that has lost share massively, from 20.7 per cent to 14.3 per cent; for the first time ever, it fell below not only industry but the so-called community services, which are a fancy name for government. Agriculture's share, of course, fluctuates wildly with the state of harvests; if the good summer monsoon keeps up its promise, the share of agriculture will go up by at least a couple of per cent in the coming year.
But what is noteworthy about recent developments is not the sliding share of agriculture, but the steady share of industry, which ever since the reforms of the early 1990s was losing share. It would be too much to say that the high recent growth has been led by manufacturing.
But the decline in its share has ceased, at least for now. If evidence can be produced for any break in trend, it is this. Looking into the details of this resurgence of manufacturing, it is metal-based industries, in particular, vehicles and machinery, that have grown fastest. It would not be untrue to say that the country has fallen in love with cars, even before the coming of Nano; but the broader truth is that it has witnessed an investment boom. Evidence for it is to be found in the cement industry as well.
And then, in recent months, the fortunes of the textile industry looked up as Pakistan ran out of luck. The floods during the last monsoon reduced Pakistan's cotton crop at about 20 per cent; its textile mills tried frantically to import cotton from India. Meanwhile, their traditional customers turned to India, whose textile industry is having a golden run.
So taking one thing with another, these are good times for Indian industry; occasional hiccups cannot disguise the fact. It is a success that deserves to be reinforced. With a yawning fiscal deficit and rising inflation, it is unlikely that the finance minister will reduce any taxes in the coming budget. But improving incentives for industry is not beyond his capacity. In particular, encouragement of capacity expansion would be particularly timely at this stage, when the rapid growth is likely to start bumping against capacity limits. Better investment allowances would be appropriate this year.
(This story was published in Businessworld Issue Dated 17-01-2011)