The State Of The Economy

2.The industrial slowdown was concentrated in two industrial groups. One was vehicles. First, the output of two-wheelers fell; they were joined by trucks and buses, and then by cars. Second, growth in textiles was very poor. The collapse of growth in vehicles has been attributed to the credit squeeze, and can be traced back to Reserve Bank’s monetary tightening. The slowdown in textiles was more likely due to the appreciation of the Rupee, which led to a fall in exports.

3.Growth in trade, transport and tourism closely parallels that in industry. It hit a relatively high trough of 9 per cent in the middle of 2005. It rose rapidly to 13 per cent by the beginning of 2006, and continued at this level till the first quarter of 2007. Then it decelerated gently to about 11 per cent by the latter half of 2007. The coincidence of the cycle in industry and trade and transport is not surprising, since industry produces the goods to trade and transport. Inflation in this sector was consistently low — generally below 4 per cent. The high level of competition kept inflation down.

4.Growth of construction slowed down considerably before industry. In 2005, when industrial growth was still low, construction was growing at close to 15 per cent. In that sense, the boom that has now ended was a construction-led boom. By early 2006, however, supply bottlenecks were emerging. Growth fell sharply to about 10 per cent, and inflation in construction materials began to rise. Inflation peaked in early 2007 and then started to come down. Growth has been maintained at close to 10 per cent. Thus while construction contributed to the macroeconomic upturn, it has not contributed much to the downturn.

5.Finance, insurance, real estate and business services show no cycle; their growth in most quarters was close to 10 per cent a year. The real economy is always starved for credit. It absorbs what credit is made available, and for the rest makes do with its own savings. But the cost of finance enables us to pinpoint precisely when the Reserve Bank’s monetary tightening began to bite. Till the first quarter of 2006, inflation in financial services was negligible — close to 2 per cent. Then suddenly in the second quarter it shot up to 4 per cent, and remained high till mid-2007.

6.The cycle in agriculture depends on the weather, and shows little correlation with other sectors. There was a bumper kharif harvest in late 2005 and early 2006. The demand it generated fed into the industrial boom through 2006. The 2007 rabi harvest was good, but nowhere near the earlier kharif. What is remarkable is the extremely high rate of inflation, in good times and bad. Agricultural prices have nothing to do with supply and demand; state procurement ensures high inflation in agriculture.

7.Overall growth in the economy is the sum of growth in the sectors, and inflation is the average of inflation in the sectors. Growth rose rapidly from mid-2005 onwards, and reached a level around 9 per cent by early 2006. It stayed at this level till the first quarter of 2007, and then began to come down. The overall cycle coincides with the industrial cycle, and has been largely driven by it. Overall inflation moves parallel to the growth cycle; in other words, the price movements were demand-driven. Policymakers, who have been saying that the downturn is temporary and that they will ensure growth at over 9 per cent, are talking through their hats. Overall growth is declining towards 7 per cent; it cannot be talked up with upbeat speeches. The economy is sliding into a slowdown, and will continue on this path until new forces of growth emerge. The finance minister should be thinking of a strongly reflationary budget, and should force the Reserve Bank to shed monetary tightness.
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(Businessworld Issue 25 Feb-3 Mar 2008)

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