Business Today: Editorial

Don't Bet The Farm Away

It now seems reasonably clear that we're not going to see an early end to the slowdown in the economy. It's time we faced the fact that the current sluggishness is not a temporary malfunctioning of the economy that can be set right by a dose of Liv-52 in the form of pump-priming. In fact, it is a symptom of a far deeper malaise-that there are too many restrictions on the way the economy is managed. Restrictive labour laws don't allow companies to rightsize, sick companies aren't allowed to die a natural death, the high cost and unreliable quality of power supply make projects uneconomical. Is it any wonder, then, that the manufacturing sector is in such bad shape? The sector grew only 2.3 per cent in April-June 2001, down from 6.4 per cent a year earlier.

Actually, industry as a whole (manufacturing, construction, electricity, gas and water supply) has been languishing for some time now, and accounts for only 24.70 per cent of the gross domestic product (GDP). That's down from 28.03 per cent in 1991-92. Clearly, the decade of reforms has not been too kind to traditional industry, and the manufacturing sector in particular. Reason enough for reforms-bashers to raise the spectre of jobless growth and an economy in decline, poised on the brink of abysmal poverty.

But is the decline of manufacturing such a major tragedy as is being made out to be? No. Because services and agriculture-in that order-comprise the bulk of our national income. Just look at the way the services sector has grown in the same period. It now accounts for nearly half (46.14 per cent, actually) the GDP against 35.99 per cent in 1991-92. It is also the fastest growing sector of the economy, logging growth rates of between 7 and 10 per cent consistently through the 1990s. In contrast, industry has fluctuated between lows of 3.4 per cent and highs of 11.6 per cent as has agriculture where growth has turned negative some years and soared to 9 per cent the very next year. Clearly, services are fast becoming the engine of growth.

At the same time, too much should not be made about the stupendous success of this sector. There is little anecdotal evidence (barring the information technology and telecom sectors) to support the macro picture of robust growth. Two economists who should certainly know what they're saying-Ashok Desai and Shankar Acharya-have both described the huge rise in the services sector as 'bogus' and 'spurious', respectively. The increase, they point out, especially in 1997-98, is due to the fat pay hikes government employees got, courtesy the Fifth Pay Commission (the contribution of the government sector is calculated on the basis of cost, never mind that the cost yields precious little benefit). And growth slipped to 7.7 per cent in 2000-01 from 9.6 per cent in 1999-2000. So we may be seeing a bottoming out of growth.

Which means we must focus again on agriculture, the share of which in GDP has been falling, from 33 per cent in 1991-92 to 29.16 per cent now. Agriculture is important because it accounts for 60 per cent of employment. It's also an area where India can compete successfully, provided it gets the right policy environment. Unfortunately, agriculture has been plagued by too much politics and too little economics for far too long, resulting in its needless decline.

Actually, both services and agriculture need to be encouraged in a big way. The problems they face are similar-infrastructure bottlenecks and policy restrictions. Instead of lamenting the decline of manufacturing, an area in which we are patently not competitive, it's time to roll up our sleeves and start removing the obstacles to the growth of sectors where we have inherent advantages.

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