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india’s recent economic Growth: a closer look
R Nagaraj

The Indian economy turned around after 2002-03, clocking a growth rate of 8.7 per cent per annum, based on an industrial recovery, a sustained growth in services (especially communications and business services), and growing exports during a boom in world trade. However, the poor and deteriorating quality of statistics seem to question the extent of the upswing. But the fact that growth has been underpinned by an unprecedented rise in the fixed investment to gdp ratio cannot be denied. For the first time, consumer credit in a low interest rate regime has boosted the demand (sweetened by fiscal concessions) for consumer durables and housing. However, the deceleration in agriculture (particularly foodgrains) and a decline in the share of fixed investment in infrastructure and industry cast doubt prima facie on the optimism about the future.

n the four years ending 2006-07, India’s domestic output grew annually at 8.7 per cent, making it the world’s second fastest growing economy after China. This includes an 8.8 per cent annual growth rate of manufacturing during the five years between 2002-03 and 2006-07, and a sustained growth in services at 9 per cent annually during the six years since 2001-02 (Figure 1, p 56).1 The high growth rate is accompanied by stable prices and a modest current account deficit in spite of spiralling crude oil prices. These accomplishments are sure signs of a buoyant economy – at least in the aggregate in the medium term. In the popular perception, the private corporate sector is the engine of growth (supplemented by foreign capital inflows), facilitated by the added momentum to infrastructure investment using the instrument of public-private partnership (PPP). Apparently, after many false starts, by trial and error, the policymakers seem to have arrived at the judicious mix of industries, institutions and instruments to propel the economy on to a higher growth path – just as China was able to do so about two decades ago. Such optimism is a welcome change from the gloomy scenario at the turn of the millennium, when domestic manufacturers faced the threat of Chinese imports, and the burst of the dotcom bubble portended the end of the software boom. How credible is the foregoing “growth story”, in terms of the economic statistics supporting it? How sound are the underlying
table 1: industrial Growth by Use-Based industry Groups, 1992-93 to 2006-07 (Average of annual growth rates in %)
Years IIP General IIP Mfg Basic Use-based Industry Groups Capital Intermediate Consumer Total Durables



1992-96 1997-02 2003-07 1992-07

6.2 5.2 8.1 6.4

6.1 5.6 8.8 6.8

7.8 3.9 6.5 5.9

0.3 5.9 14.3 6.8

8.0 6.2 6.1 6.7

4.2 5.6 9.6 6.4

7.3 9.7 8.8 8.7

3.7 4.3 10.4 6.0

Source: CSO web site.

I am grateful to the officials in the Central Statistical Organisation and the Reserve Bank of India who spared their valuable time to discuss methodological details in estimating services sector output. However, I am alone responsible for the interpretation reported in this paper. Following the usual disclaimers, I am indebted to the journal’s referee and Atul Kohli for their comments and suggestions on an earlier version of the paper. R Nagaraj (nagaraj@igidr.ac.in) is with the Indira Gandhi Institute of Development Research, Mumbai.
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real factors or the “the economic fundamentals”? To find out, this paper examines industrial performance since 2002-03, and the services sector over a longer period at a disaggregated level using the official statistics, subjecting them to critical scrutiny. The widely held views are reassessed to offer a nuanced yet firmer picture of the recent economic performance.

1 industrial and services Growth
Based on the index of industrial production, Table 1 and Table 2 (p 56) describe the average annual growth rates of industrial output over five-year intervals since 1990-91 – by use-based classification, and by two-digit industry groups respectively. There has

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indeed been a turnaround since 2002-03, ending the period of (ii) business services that have witnessed most dramatic indeceleration that lasted for seven years since 1995-96. The an- creases: from 8 per cent to 18.8 per cent and from 13 per cent to nual average growth rate in manufacturing between 2002-03 and 23.3 per cent respectively. The rapid growth in these two services 2006-07 is 8.8 per cent, up from 5.6 per cent during the previous Figure 1: economic Growth, 1991-07 (in %) five years. The improvement is widespread across the use-based 20 industries, as also across all two-digit industry groups. Capital Manufacturing 15 goods have led the recovery with an annual average growth rate Services 10 GDPfc of 14.3 per cent – in sharp contrast to near zero growth between 5 1992-93 and 1995-96 when these industries were faced with a sudden and sharp decline in tariffs. In terms of use-based indus0 1991 1993 1995 1997 1999 2001 2003 2005 2007 try groups, the capital goods recovery is led by transport equip-5 ment, in other words, the automotive industry. Since the early 1990s, services have emerged as the economy’s has increased their combined share in services output from 3.4 “leading sector”, increasing their share in domestic output from per cent in 1991-92 to 14.6 per cent in 2005-06 – representing 42 per cent in 1991-92 to 54.7 per cent in 2006-07. The recent one-fifth of the incremental output in the services sector. Another aspect of services growth in the recent surge represents a continuation of the table 2: industrial Growth by two-Digit industry Groups years is that it has occurred in the priacceleration, except for a brief dip in (1992-93 to 2006-07, average of annual growth rates in %) NIC Industry Group 1992-96 1997-02 2003-07 1992-07 vate corporate sector, unlike most serv2001-02. While theories abound to ex20-21 Food 4.6 2.7 4.1 3.8 ices growth that is in the unorganised plain the foregoing trend, efforts to un- 22 Beverages 9.2 11.6 14.8 11.9 sector [Shetty 2007]. derstand the underlying growth at a 23 Cotton textiles 6.8 2.4 5.0 4.6 In short, while industry revived after disaggregated level have been limited, 24 Silk, wool textiles 10.7 9.0 4.2 8.1 2002-03, and services sustained their which seems particularly serious since 25 Jute 1.3 -0.2 -1.5 -0.1 0.6 3.8 11.7 5.3 growth in the current decade, it is capiservices form such a diverse collection 26 Textile products 27 Wood 5.0 -4.3 0.8 0.2 tal goods, communications and busiof economic activities with varying 7.4 5.4 8.2 6.9 nesses that are at the forefront of the sources of stimuli, technologies, market 28 Paper 29 Leather 1.2 8.3 -0.9 3.2 recent surge in domestic output. conditions and forms of organisation. 30 Rubber 3.4 6.7 5.9 5.4 As a first step, we compare the trend 31 Chemicals 6.6 8.0 9.0 7.8 2 reliability of estimates growth rates in services sector value 32 Non-metallic minerals 8.9 9.0 6.8 8.3 Some aspects of the reliability of output added during the 1980s and thereafter, 33 Basic metals 13.6 3.0 12.5 9.3 estimates are discussed in this section. at a disaggregated level, using the 34 Metal products -2.2 6.4 5.2 3.3 National Accounts Statistics (NAS). The 35-36 Electrical and non-elec m/c 3.0 6.4 12.7 7.3 2.1 industrial statistics data shows that the acceleration is 37 Transport equipment 8.0 7.6 12.7 9.3 Until 2000-01, value added in registered mainly on account of the following sub- 38 Other mfg 3.5 4.8 11.8 6.6 6.1 5.6 8.8 6.8 manufacturing that accounts for about sectors constituting about one-third of 2-3 Manufacturing two-thirds of total manufacturing was domestic output, and a little less than Source: Economic Survey, various issues. estimated using factory level data two-thirds of services sector output table 3: Growth rates of services at a Disaggregated level, 1980-81 to 2005-06 (in % per year) collected under the Annual Survey of (Figure 2, p 57): Service Trend Growth Rates during Industries (ASI). Unregistered sector (1) Trade, hotel and restaurants 1981-05 1981-91 1992-06 1 Road transport 7.6 6.9 8.3 value added was obtained by the “in(2) Transport other than railways 2 Water transport 10.3 4.7 9.5 direct method”, that is, as a product of (3) Communications (-) 0.7 5.8 2.2 value added per worker (based on sam(4) Personal, social and community 3 Air transport 4 Services incidental to transport 7.8 9.5 6.7 ple survey estimates) and the number of services. 5 Postal services (-) 0.1 3.9 (-) 3.7 workers in each industry (from the NSS Among these, it is communications 6 Telephone service 14.2 8.0 18.8 surveys or the population census). While that has witnessed the largest increase 7 Miscellaneous communication services 6.6 (-) 13.7 27.8 there were always concerns about the in its growth rate, which jumped from 8 Overseas communication services 19.2 17.4 18.2 unreliability of the unregistered sector 5.8 per cent per year in the decade of 9 Business services 17.1 13.0 23.3 estimates, the ASI data were considered the 1980s, to 20.4 per cent per year 10 Community services 7.8 7.1 8.9 relatively satisfactory. But, this longbetween 1992-93 and 2006-07. 10.1 Education 7.7 7.1 8.8 held practice was abandoned as the ASI As the foregoing categories of serv- 10.2 Medical and health 8.2 8.0 9.4 2.6 3.0 1.9 estimates were found to have become ices seem too aggregated to give a 11 Recreation and entertainment (-) 0.9 9.3 (-) 17.5 unreliable, substituted by the Index of clearer picture, we now report a further 12 Radio and television 13 Personal services 4.7 2.9 6.6 Industrial Production (IIP). disaggregation, also using the NAS, in 6.2 5.4 6.7 As is widely known, the IIP is the leadTable 3. While a variety of services re- 13.1 Tailoring 13.2 Sanitary services 5.7 7.0 4.9 ing short-term indicator of value of outported higher growth rates between 13.3 International and extra put based on physical indicators of pro1992-93 and 2006-07, compared to the territorial services (-) 0.4 3.1 2.7 duction. It is designed to provide output 1980s, it is (i) telephone services and Source: National Accounts Statistics, various issues.


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estimates at one-digit levels, namely, mining, manufacturing and electricity.2 Evidence on the reliability and accuracy of the IIP suggests the following: (1) As the year move away from the base year, trends in production diverge between the IIP and the ASI, (2) At the two-digit level of industrial classification, IIP is not a good predictor of production trends as found in the ASI. How is the index computed? It is based on the monthly production data voluntarily supplied by factories and firms. Though the grant of a licence for production mandated the supply of monthly production statistics to the official agency, the rule was never applied in practice. As firms have no incentive (or penalty) for submitting the information, especially in the liberal policy regime, the primary information for computing the IIP has weakened in recent decades [Kulashreshtha and Kolli 1995]. When fresh data are not forthcoming, the official agency simply repeats the past information.3 Thus the IIP has widely known to have become an unreliable barometer of industrial output.4 In the days of industrial licensing, it was found that the IIP underestimated industrial production compared to the ASI. But with the dramatic fall in the submission of the monthly production data to compute the index, in recent times, there is little basis to believe that the same pattern holds any longer. Thus, the substitution of the ASI with the IIP has meant a serious dent in the reliability of the official estimates of industrial output, especially at the disaggregated level (two and three digit of NIC). This view is fully endorsed by the recently released official National Accounts Statistics: Sources and Methods. To quote:

sectors that have boomed recently (as discerned in the previous section).

2.2.1 communications
Without doubt, of late, new private corporate firms have displaced the public sector monopolies in providing telephone services. CSO has responded to this develop- Figure 2: Growth in services, 1981-2007 ment by using number of sub- (in % per year) 0 5 10 15 20 25 scribers to compute the value 5.9 added in this service, supple- Services 8.4 menting its usual procedure. Its 6.5 Sources and Methods states: Trade
10 15 20 25 1981-91 0 5 1992-07


The estimates of value added from…communications in [the] public sector are based on up-todate and reliable information. For the private sector, the estimates are compiled mostly through indirect methods using proxy indicators, such as number of telephone connections or extrapolating with inter-survey growth rates in [the] workforce [CSO 2007: 161] (emphasis added).

Hotel and restorant

4.4 10.3 6.8 8.1 7 21.5 5.4 7.2

Other transport


Other services

1981-91 1992-07 Apparently private cellular phone operators have been overstating their subscriber base in order to secure a larger share of the “spectrum” – the radio spectrum frequencies that carry mobile phone signals. A priori, such a practice seems eminently plausible as the private firms have their …ASI data since the 2000-01 onwards could not be used as the growth rates for the years 2000-01 and 2001-02 are not in line with the incentives to do so, perhaps quite similar to what used to happen growth rates indicated by the index of industrial production, excise in the erstwhile licensing regime when firms routinely overstated revenue collections or the corporate sector (manufacturing segment) their capacity utilisation to corner industrial licences and prevent data. It was, therefore, decided…to use the IIP data at a detailed entry of new firms. level, for compiling the estimates of value of output and value added Such plausibility is brought to light in the ongoing dispute befor subsequent years, till there is convergence between the IIP based GVA [gross value added] estimates and the ASI based GVA estimates tween Tata Teleservices (representing CDMA technology) and the [CSO 2007: 126]. association of GSM service providers, Commenting on the quality and limita- table 4: sector-wise shares in Fixed investment in total GFcF when the latter has been accused by the (at 1999-2000 Prices, average of years, %) tion of the data, the official document former of hoarding the spectrum by inIndustry/sector 1992-96 1997-01 2002-06 further said: flating the number of subscribers.6 If the 1 Agriculture and allied 9.4 8.6 9.0 charge is correct, then prima facie there 5.0 2.2 1.9 Limitations of IIP are well documented, 2 Mining most important being the old base years, 3 Manufacturing is overestimation of value added in com29.3 37.0 30.7 non-response, coverage of new units and 3.1 Registered manufacturing 21.7 27.7 21.4 munications, a reason to suspect the ofnew products [CSO 2007: 127]. 3.2 Unregistered manufacturing 7.7 9.3 9.3 ficial estimates of growth. Further, it is 4 Electricity, gas and water 12.6 9.0 7.1 widely acknowledged that the revenue 5 Construction 1.0 1.7 2.6 2.2 services sector Database per telephone subscriber line (be it land 6 Trade, hotel and restaurants 3.2 2.8 3.1 Data on services output, outside of publine or cellular) has come down, expect7 Transport, communications 11.9 11.7 11.6 lic sector, are obtained by the indirect edly, with the growth in the number of 7.1 Railways 2.4 1.4 1.4 method mentioned earlier, namely, as a 7.2 Other transport subscriptions, which could further erode 6.2 6.7 7.5 product of (dated) parameters of value 7.3 Communications the value added in this service. 3.3 3.6 2.6 added per worker of various services 8 Banking and financial services; real estate and business services 13.3 15.1 16.0 2.2.2 Business services activities and their employment esti8.1 Banking and insurance 2.8 2.1 1.0 As is widely known, this service mainly mates. The official economic statisti8.2 Real estate and business services 10.5 13.0 15.1 consists of exported information technocians seem so unsure of the magnitudes 9 Community, social and public services 13.6 11.9 14.1 logy (IT) and IT enabled services (ITES), and reliability of these estimates that 9.1 Public administration and defence 10.6 7.9 8.4 whose value is reported in foreign exthey are not even in a position to gauge 9.2 Other services 3.0 4.0 5.7 change, as they are almost entirely exportthe direction of bias in them.5 We will 10 Total 22.7 24.6 27.7 delve on the problems relating to the two Source: National Accounts Statistics (NAS), back series; NAS 2007. oriented activities. As there is no official Economic & Political Weekly EPW

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monitoring or regulatory agency for this sector, government does not have an independent access to information. Therefore, it depends on NASSCOM, the industry association, which supplies data on the foreign exchange earnings of these services that the RBI uses for estimating the balance of payments and the CSO for computing the national accounts. No firm, region, or item-wise break up is reportedly provided that would permit cross verification of the aggregate numbers. In attempting to do so, using the estimates of the WTO and the US official statistics, Chandrasekhar and Ghosh (2008) have offered a basis to suggest overestimation by NASSCOM, the plausible reason being the double counting of earnings of software professionals both as software exports as well as remittances. Value added in this sector is arrived at by subtracting the rupee value of intermediate inputs from the value of the exports. Since these services are mostly labour intensive, with limited imported intermediate inputs, value added per worker shows the dollar value of the labour services. This explains why the phenomenal growth in the value added in these services has not led to a corresponding rise in employment. In other words, if these services were to be values at domestic prices, then the growth rates would probably get reduced to one-fourth or one-fifth of the reported numbers. Thus, the foregoing discussion indicates the infirmities in the estimation of output of precisely those sectors that have witnessed rapid growth recently.7 However, this is not to dismiss the recent upsurge in output growth, but to suggest a re-examination of the quantitative bases for assessing the growth in these industries and services.

expected to contribute to fixed capital formation is not rising. A closer look at the FDI inflows suggests that on an average about 29 per cent of the inflow between 2004 and 2007 went to acquire existing equity capital, which does not represent net addition to the economy’s capital stock; in other words, it went to acquire managerial control in domestic companies.8 Further, on average, about 22 per cent of the FDI in the same period represented “reinvested earnings”, which does not represent fresh capital inflow.9 Therefore, on closer scrutiny, foreign capital’s contribution to additions to the fixed capital stock is modest; most of the growth in fixed investment is financed using domestic resources. By type of investment, much of the increment has occurred in construction (as against machinery and equipment) as its share in GFCF has turned around in the late 1990s to surpass 50 per cent mark – and to exceed the level it recorded in 1980-81 (Figure 5). History suggests that with modern economic growth the share of construction goes down as that of machinery and equipment rises. India too broadly followed this pattern, but what we are witnessing lately is a mild reversal of the trend. By industry of use, the increased fixed investment has gone into real estate and construction, as shares in total GFCF has gone up from 10.5 per cent and 1 per cent respectively during 1992-96 to 15.1 per cent and 2.6 per cent during 2002-06. The other booming
Figure 3: investment ratios (in%)
40 30 20 10 0 GCF/GDPfc


3 Understanding recent Growth
Notwithstanding the foregoing statistical disputation, there are reasons to believe a genuine and substantial expansion of domestic output in recent years. India’s fixed investment rate – gross fixed capital formation (GFCF) as a ratio of domestic output – has gone up by 7 percentage points in five years to reach 33 per cent in 2006-07 – up from around 25 per cent in the second half of the 1990s (Figure 3). It represents the largest increase in the investment rate India ever witnessed, taking it close to those attained by the east Asian economies in their phase of rapid economic growth. This does not include 1.2 percentage points of the domestic output “invested” by purchasing mostly gold by resident Indians, which in recent years get recoded as investment as per the guidelines of the 1994 UN System of National Accounts. Discounting for “investments” in gold, the gross capital formation has risen from 22.8 per cent of GDP at current prices in 2001-02 to 35.9 per cent in 2006-07. Is this increase in the investment rate on account of the boom in foreign capital inflow? No, the rise in the investment rate is almost entirely financed by domestic resources as there is a corresponding rise in the gross domestic saving rate, from 23.7 per cent of GDP at current prices to 34.8 per cent during the same period; foreign investment accounts for 1.1 per cent of domestic output. As is widely known, inflow of foreign private capital has boomed in the current decade, especially since 2004 (Figure 4). But the share of foreign direct investment (FDI), which in principle is

1990 30 25 20








2006 2007 120

Figure 4: Foreign capital inflow
Total foreign investment inflow (left hand side)

FDI’s share in total (right hand side)

100 80 60 40 20 0 Per Cent

Billion US $

15 10 5 0 1991 1993 1995 1997 1999 2001 2003 2005 2007

Figure 5: share of construction in GFcF (in %)
80 60 40 20 0 1951 1957 1963 1969 1975 1981 1987 1993 1999 2005

sectors are transport (excluding railways), and community, social and public services (other than public administration and defence) (Table 4, p 57). Not unexpectedly, much of the construction is in the private sector as the public sector’s share in total GFCF has dwindled (Figure 6, p 59). The boom in private housing since the late 1990s spurred by income tax concessions to individuals in a low interest rate regime, together with the massive road building project – the Golden Quadrilateral Programme connecting the four metros
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that started in 2000 – seem to account for the growth in conHowever, agriculture (especially foodgrains), which still acstruction. These measures were precisely intended to revive the counts for one-fifth of domestic output and a little over one-half sagging economy. Though officially the project is now more or of the workforce, and is widely acknowledged as a source of inless complete (with considerable time Figure 6: share of public sector and construction in GFcF (in %) dustrial demand, has decelerated over a and cost overruns), it is followed up by 80 longer period, especially foodgrains Construction’s share in public sector GFCF the north-south and east-west corridor 60 (Figure 10, p 60).11 Though electricity generation capacity has improved projects diagonally interconnecting the 40 somewhat after 2003, it is still at the four metros.10 Though these invest20 ments have only marginally added to low levels recorded in the early 1990s Public sector’s share in GFCF 0 the net road length, they have widened (Figure 11, p 60). 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 the highways, improved their quality While industrial demand conditions and expanded the carrying capacity of Figure 7: commercial Vehicles Output (in 000s) turned favourable for the foregoing the existing road network. Interestingly, 600 reasons, private corporate profitability despite the huge public investment in 400 also improved perceptibly in the curthe road projects, the public sector’s 200 rent decade (Figure 12, p 60). What exshare in construction has come down, plains this improvement? Subject to 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 suggesting that other public works proverification, it could be the outcome of grammes have shrunk. restructuring of production – retrenchFigure 8: Distribution of long-term loans by commercial Banks Expectedly, better roads have “crowd- (in %) ments and layoffs, closures and reloca60 60 ed-in” private investment in trucks, es- 50 tions, selling off unprofitable busi40 pecially of multi axel higher payload 40 nesses, amalgamations and mergers – 30 vehicles that reduce freight cost per 20 2000 2006 that took place during the seven-year 20 10 tonne-kilometre (Figure 7). Better roads 00 period of deceleration since the midAgriculture Industry Personal Others Ag. Industry Personal Others have also boosted the demand for pri1990s, helping industry to regain its Major user groups vate transport, lubricated by easy access competitive strength to face the to “vehicle loans” at low interest rates, increasing capital goods changed policy environment. output and fixed investment in non-rail transport sector. Apparently, with the success of domestic enterprises in softSo, the proximate causes of the industrial turnaround are get- ware exports, many lines of manufacturing rediscovered their ting clearer. Surely, the boom in construction and real estate international competitiveness (and self-confidence) to look to excould boost demand for a sizeable cross section of manufacturing ternal markets so as to reduce their dependence on domestic deindustries. Additionally, growth in merchandise exports that mand. Realising the need for market access in increasingly reclocked 48 per cent per year since 2002-03 could be an added gionalised global trading arrangements and to upgrade technolcontributor [Veeramani 2007], which is consistent with the long- ogy, many large domestic firms have started acquiring firms and term pattern of Indian exports being pro-cyclical; the turnaround factories in the developed markets to secure marketing channels, in world trade after and popular brand names [Nagaraj 2006]. Figure 9: Distribution of Outstanding 2002 could have pulled personal loans (as on March 2007) 2% Consumer durables up Indian exports 3.1 What explains services Growth? As described earlier, communications and businesses services ac[Sinha Roy 2001]. 51% Housing 32% Apparently, for the count for a sizeable portion of incremental output. While commuOthers first time, consumer nications’ growth is based on domestic demand, business services credit has played a sig- seem entirely export driven. Deregulation and technological change nificant role in ex- in telecommunications augmented the production possibility fron3% panding industrial de- tier. Growth in communication represents bridging the huge unEducation mand. According to met demand for telephones, by expansion of the existing firms, 3% Credit card the RBI, between 2000 entry of private firms and the introduction of newer technologies. 9% Advances against fixed deposits and 2006, distribution Mobile communication is an innovation that has diffused worldof long-term loans increased only for consumer credit, declining wide creating a new product and giving rise to new demand. How does one understand the software boom? While it surely for agriculture, industry, and others (Figure 8). On a further disaggregation, one-half of the consumer credit has gone for represents a fuller utilisation of India’s stock of technical and scihousing, and the rest would have directly or indirectly contributed entific manpower, it is also an outcome of policy choices. Until to consumer durables’ demand (excluding education loans) 1991, India sought to simultaneously promote computer hard(Figure 9). Thus, it seems reasonable to suggest that consumer ware and software industries. Hardware prices were high becredit propelled much of the demand for consumer durables, in- cause of tariffs, and the industry’s growth was sluggish on accluding automobiles, which are counted as capital goods (in use- count of the inverted duty structure – that is, tariffs were higher based classification of industrial production), contributing to the on intermediate inputs compared to the final products. Given the low stock of computers, access to them was restricted though sector’s turnaround.
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there was enormous potential of its use given the large stock of qualified engineering and science graduates. The reforms in the 1990s slashed the tariffs on hardware across the board, without correcting for the inverted duty structure. The result was that India was able to utilise its low cost engineering skills to produce software services for export, though the country lost an opportunity to create an efficient hardware industry. As a fiber optic network spread across the world, dramatically reducing the cost of communication, the outsourcing industry was born, turning nontradable services like office work into tradable outsourcing back office operations.
Figure 10: trends in agriculture Output, 1981-07 (in %)
4 3 2 1 0 GDP agriculture 1980-91 All crops Foodgrains Nonfoodgrains Cereals Rice Wheat

Figure 11: Growth in electricity Generating capacity (in %)
14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 1982 1982 1984 1986 1984 1986 1988 1988 1990 1990 1992 1992 1994 1994 1996 1996

1991-2000 1991-07 Figure 11: Growth in Electricity Generating Capacity (in %)

1998 1998 2000 2000

2002 2002

2004 2004

2006 2006

Figure 12: Corporate Profitability Ratios, 1991-06 (in %) Figure 12: corporate profitability ratios, 1991-06 (in %)
18 16 14 12 10 8 6 4 2 0 1991 Profit after tax to networth Gross profit to sales

Gross profit to total net assets

in 2006-07. This claim is suspect, for methodological reasons. There are no estimates of domestic product originating in this sector. The RBI’s estimates of savings and investment are obtained by “blowing up” the figures using the balance sheet data of about 2,000 large companies from the population of registered companies. Such a procedure was suitable when the universe of the registered companies was known (from the census of the registered companies) and the RBI sample of companies accounted for the majority of the sector’s paid-up capital and sales. In the past two decades, the number of registered companies has grown manifold, with little relation to the growth in economic activity, or the number of registered factories. As a majority of these companies apparently do not submit their annual audited accounts to the registrar of companies (as mandated in the law), what proportion of the registered companies are genuinely working companies is not known.12 This shortcoming has adversely affected the “blowing up” methodology as it yields an overestimate of savings and investment in the private corporate sector. One can question the official estimates by looking at the gross value added by private corporate enterprises in the factory sector that account for the bulk of the private corporate sector. This was estimated in 2004-05 at a mere 8.5 per cent of GDP.13 The average for 2001 to 2005 is about the same. Admittedly, this estimate leaves out corporate firms operating in plantation agriculture and in services. Even if we make a generous allowance of their value added to be 3-4 per cent of GDP, it is hard to believe that this sector could account for the fastest growing segment of domestic savings and largest segment of domestic investment. This is a serious lacuna in India’s statistical system, as the National Statistical Commission (2001) (chairman: C Rangarajan) has in fact conceded:
There are more than five lakh companies registered in the Registrar of Companies (ROCs) but the actual number of companies, which are operating, is not known. This situation seriously affects the reliability of various estimates. An exercise conducted in March 1999 indicated that about 47 per cent of the registered companies filed their balance sheet for the year 1997-98 with the ROCs. RBI studies on Company Finances are based on the annual reports and balance sheets of certain sample companies. In the absence of a reliable population frame, the RBI is not in a position to apply suitable sampling techniques. Further, the RBI is also constrained by the poor response from companies and non-receipt of annual reports directly from the ROCs. The RBI’s findings are thus based mainly on the data of responding companies and the Fact Sheets prepared by the DCA. The reliability of the estimates of gross savings and investment in the private corporate sector arrived at by blowing up the sample results available from the RBI’s studies in proportion to the coverage of the paid-up capital (PuC) of the sample companies to the PuC of all companies has been questioned time and again (http://mospi.gov.in/ nscr/mp.htm) (Vol 2, Annex 12, Section 12.1.8).

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Figure 13: GFcF estimates for private corporate sector
10 10
Per cent of GDP Per cent of GDP
Year ending

Figure 13: GFCF Estimates f or Private Corporate Sector







2005 2006

88 66 44 22


00 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 Source: Rajakumar (2003).

As mentioned earlier, growthYears in non-rail transport can be explained by expansion of road and air services; growth in real esGFCF-CSO Variations tate is on account of the housing boom and the boom in businesses that require modern high quality office space. Growth in “other services” represents the boom in private education and medical services. This is also supported by a rapid rise in fixed investment growth in these services.

3.2 institutional sources of Growth
The private corporate sector is widely believed to have contributed much of the recent growth (including foreign owned firms), as it has emerged as the largest institutional category of domestic investment, contributing 40 per cent of gross capital formation

In a careful methodological exercise, Rajakumar (2003) showed that the actual level of GFCF in the private corporate sector in the 1990s was roughly one-half of the official estimates (Figure 13). It would be reasonable to infer that the actual and the official estimates would have diverged further in the present decade, as fresh registration continues to boom.14 Therefore, the widely held view of the economy being led by this sector is questionable.
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If the above diagnosis is correct, then the view that the private corporate sector is the engine of the recent economic boom needs a serious correction. If so, then which sector accounts for the sharp rise in domestic savings and investment? It is the household sector, as it happens to be the residual. To be sure, this qualification does not question the growth of aggregate savings and investment but the contribution of the private corporate sector.

4 conclusions
This paper sought to take a closer look at the statistical bases for studying growth in the industrial and services sectors that have boomed recently in India, and its proximate causes. As the quality of industrial statistics has deteriorated and the methodological bases for estimating the services sector’s growth are weak, there can be legitimate concerns about the true extent of the economic expansion. This is not to deny significant and rapid expansion of economic activity that has taken place across a wide spectrum of industries and services lately. While industrial growth seems widespread across two-digit industry groups and use-based categories, the services boom since 1991-92 is dominated by communications and business services accounting for 20 per cent of the incremental value added in services between 1991-92 and 2006-07. While the communications boom seems largely domestic-demand led growth, business services seem entirely export driven.
1 Unless otherwise mentioned, all economic statistics used in this paper are at constant prices. 2 For an official account, see http://mospi.nic.in/ iip_intro.htm 3 For details, see Nagaraj (1999); Singhi and Mishra (1997). 4 The official web site (http://mospi.nic.in/iip_report.htm) clearly states: The National Statistical Commission set up by the government to suggest measures for improvement in the statistical system in the country took note of the deficiency in the quality of all-India IIP compiled by CSO and made a number of recommendations of technical as well as administrative nature for improving the quality of the IIP. Some of the major recommendations of the NSC on the existing IIP are summarised below: (a) The base year of IIP should be revised quinquennially; (b) The item basket should be representative of the indices at two-digit level; (c) The source agencies should strengthen their statistical set-up so as to be able to effectively monitor new units and new items; (d) The source agencies should establish contact with the manufacturing units through fax, e-mail, personal visits, etc; (e) The source agencies should seek the cooperation of industrial associations, state governments, etc, in improving the response from the manufacturing units; (f) Inclusion of items reported by less than five factories to be generally avoided. However, if such items are included, source agencies must ensure 100 per cent coverage in reporting of data by such units; and (g) Robust estimation procedure must be adopted by the source agencies to tackle the problem of non-response of the manufacturing units.
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The surge in growth is associated with an unprecedented rise of the fixed investment rate by about 7 percentage points to 33 per cent of GDP in 2006-07. It is a construction led boom in private housing and road building, smoothened by access to credit at low interest rates. Merchandise exports grew at 48 per cent per year, in tune with the cyclical upswing in world trade. With deceleration in agriculture (particularly in foodgrains), and a decline in the infrastructure and manufacturing sectors’ share in gross fixed investment in the present decade, sustaining the high growth rate over a longer period appears moot. Is the private corporate sector the main engine of growth? Probably not, as its savings and investment are overestimated because of methodological deficiencies. Therefore, the rise in savings and investment has occurred in the household sector. Further, the deteriorating quality of data reporting for industry and unreliability of estimation of value added in communications and business services casts doubts about the real magnitudes of their growth, though one is not in a position to hazard a guess as to the extent of overestimation. If the dots of scepticism expressed in this paper are connected, does a picture emerge that is seriously different from the widely held view? Probably yes. If the proximate causes that we have suggested for the industrial turnaround are correct, then they seem to indicate the fragility of the observed turnaround. Our scepticism somewhat muddies the picture of the recent growth significantly enough to cast doubt on the optimistic scenarios portrayed.
corporations. If anything, our method leads to an overestimation that only strengthens our argument. 14 The obverse of what we described for the private corporate sector would hold for the household sector.

5 For a detailed account of the limitations of the estimation methods for the services sector, refer to the set of papers published recently in the Economic & Political Weekly, September 15, 2007. 6 The dispute erupted when Ratan Tata, chairman, Tata Tele Services, accused GSM operators of inflating their subscriber numbers. Reportedly Yankee Group, a US based consultancy firm, found that the number of mobile hand sets sold in India (including the second-hand sales) to be less than the growth of mobile connections. On this basis, the subscriber base is claimed to be overestimated by 10-15 per cent – a view that GSM operators contest. Though we have not been able to find evidence, there is perhaps merit in the overestimation argument. 7 An illustrative exercise, reducing communication to 80 per cent of the actual (to adjust for overestimation of the number of cellular lines) and business services to one-fifth (the ratio is same as between the dollar value of GDP and PPP value of GDP) reduces GDP growth rate from 6.2 per cent to 6 per cent and services growth from 8.2 per cent to 7.8 per cent for the period 1991-92 to 2005-06. 8 SIA news letter, December 2007, Table 1, “Statement on year-wise/route-wise FDI equity inflow”. 9 RBI’s FDI inflow data as per international practices, reported in January 2008. 10 Annual Report, Ministry of Surface Transport, 2006-07, government of India. 11 We have avoided presenting an average of annual growth rates over shorter time intervals, given high yearly variability in agricultural output. 12 Here is evidence to support our contention. As of March 2007, there were 0.7 million registered companies; only 43 per cent of them filed their annual returns till February this year (The Hindu, March 14, 2008). 13 ASI provides data by type of organisation. We have taken the private corporate sector to be sum of public and private limited companies. We assume that all public sector entities are included under (i) government department enterprises, and (ii) public

Chandrasekhar, C P and Jayati Ghosh (2008): ‘How Big Is IT’, Business Line, March 11. CSO (2007): National Accounts Statistics: Sources and Methods, http://mospi.nic.in/rept%20%20pubn/ ftest.asp?rept_id= nad09_2007&type=NSSO Kulashreshtha, A C and Ramesh Kolli (1995): ‘Impact of Liberalisation on Data Collection’, The Journal of Income and Wealth, Vol 17, No 2, July. Nagaraj, R (1999): ‘How Good Are India’s Industrial Statistics? An Exploratory Note’, Economic & Political Weekly, Vol 34, No 6, February 6. – (2006): ‘Indian Investments Abroad: What Explains the Boom?’, Economic & Political Weekly, Vol 41, No 47, November 18. Government of India (2001): National Statistical Commission (Chairman: C Rangarajan), Ministry of Statistics and Programme Implementation. Shetty, S L (2007): ‘Status Paper on Database Issues of the Services Sector’, Economic & Political Weekly, Vol 42, No 37, September 15. Singhi, M C and J P Mishra (1997): ‘Industrial Production Statistics’, Paper No 20, Studies in Industrial Development, Ministry of Industry, Government of India. Sinha Roy, Saiket (2001): ‘Post-Reform Export Growth in India: An Exploratory Analysis’, RIS Discussion Paper No 13/2001, Research and Information System for the Non-Aligned and Other Developing Countries, New Delhi. Rajakumar, Dennis J (2003): ‘How Real Are the Estimates of Corporate Investment?’ Economic & Political Weekly, Vol 38, No 22, May 31. Veeramani, C (2007): ‘Sources of India’s Export Growth in the Pre- and Post-Reform Periods’, Economic & Political Weekly, Vol 42, No 25, June 23.

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