Is industryless growth here to stay?

Readers are familiar with the concept of jobless growth. But India is now demonstrating a less familiar phenomenon, which, for want of a better phrase, can be called industryless growth. This was unsurprising last year, when the global recession forced down industrial growth everywhere, including India. Industry typically grows more slowly, or falls faster, than GDP in a business downswing. But in 2002 the world has swung up out of the recession, notwithstanding some fears of a second downward dip in coming months. Many of our Asian neighbours have recorded big jumps in industrial growth, with Singapore leading the pack at 18.9 per cent. But in India industrial growth continues to lag behind GDP growth even in a global recovery.

Now, the phrase jobless growth does not mean no new jobs whatsoever. It simply means that jobs grow proportionately less than GDP. Similarly, industryless growth does not mean no industrial growth at all. It means industry is growing more slowly than GDP. Instead of being the locomotive of growth, as in most developing countries, it has in India become a passenger that has to be pulled forward. by the services sector.

Ever since the global recession set in, India has been the second fastest growing economy in the world. This has been a matter for some satisfaction. Many miracle economies in East Asia ground to stagnation in this period, while Latin America has been imploding.

The accompanying data gives recent data for top developing countries. The data are not always comparable across countries. GDP relates in some cases to the second quarter and in others to the first quarter. Industrial growth relates in some case to May, in others to June or July. Yet it is gives a bird’s view of trends.

It shows that India has the second highest rate of GDP growth but only the eighth highest industrial growth among the countries in the table. Many countries that lagged well behind India during the recession are soaring industrially in the global recovery. Singapore, whose GDP growth was just 3.9 per cent in the latest quarter, has registered industrial growth of 18.9 per cent in June. The Philppines has recorded 3.8 per cent GDP growth but 10.7 per cent industrial growth. Taiwan has registered barely any GDP growth at 0.9 per cent in the latest quarter, yet its industrial output has soared 8.4 ;per cent in June.

By contrast India, with GDP growth of 6.4 per cent in the most recent quarter, has registered a pretty pathetic industrial growth rate of 4 per cent in June. True, this is virtually double the rate a year earlier. But that is cold comfort. Almost everywhere else in Asia–Hong Kong is the one exception–a modest acceleration of GDP has spurred a most faster acceleration of industry. Even Russia, now regarded as a commodity producer like OPEC or Africa, is currently registering faster industrial growth than India.

In Latin America, industrial growth is swinging downwards rather than upwards. This is because of the region’s financial woes, which originated in Argentina and are now spreading like a virus to the whole region. Brazil, by far the biggest country in the region, is in serious danger of going down the Argentinean path for no good reason other than international financial panic, which may becoming self-fulfilling. Even Chile, long a miracle economy, is caught in the downdraft. Now, in a downdraft it is common for industry to suffer as much or more than GDP. India, however, is witnessing lagging industrial growth even in an upswing.

Some pessimists will say that, given the poor monsoon, India may not experience an upswing at all. Some forecasts put GDP growth at no more than 4 per cent this financial year. However, these downbeat forecasts reflect rainfall conditions from July onwards. Rainfall had no impact on industrial data for the first six months of 2002, a period when the rest of Asia has surged way ahead of India industrially. No, monsoon failure is a minor explanation for India’s industrial stagnation.

Many businessmen feel that India cannot compete with China, which is beating Indian producers in both the Indian and global markets. But businessmen have similar fears all over south-east Asia. China seems to be able to beat everybody. Despite this, many Asian countries have surged ahead industrially in recent months., India has not.

I have no space in this article to dwell at length on the many issues that depress our industrial prospects. Appreciation of the real exchange rate, high real interest rates, reservations for small scale industries, high import tariffs that make raw materials costly, inflexible labour regulations—all these issues have been analysed in detail by many others. After the Gujarat riots and threatened war with Pakistan in June, security has become an additional drag.

But while we have a long list of problems, we do not have a crisis. Without vibrant industry, GDP cannot grow faster than 5 to 6 per cent, but that seems a perfectly acceptable rate politically. Every reform tends to create losers before it creates winners, which is why politicians are reluctant to reform radically save in a crisis. Our political economy has settled into an equilibrium where there is little political incentive to rock the boat with radical change.

So, slow industrial growth looks here to stay for some time. Indeed, even as the rest of Asia speeds past India industrially, this country could remain the second-fastest growing economy after China, thanks to its burgeoning service exports.

Many countries of the West have agonised about jobless growth and then shrugged their shoulders. We are agonising about industryless growth, but may end up shrugging our shoulders too.

Growth sans industry

Source:The Economist