High interest rates have started doing their trick and in my last write up I had said that how long can RBI continue with high rates now the question gains more importance than ever and I feel in the current scenario if RBI continues to give more importance to inflation than economic growth we would in for some tough times. I am not saying that inflation is not important but since the headline inflation is in control and already below the RBI comfort level RBI can now start looking at effects of higher rates on economic growth more closely than inflation.
CSO last week released Indian economic numbers and as per expectation the Indian growth moderated to 8.7% but the big surprise to me was agricultural growth which plummeted to 2.6%. Industrial growth was down to 9% and Services 10.2%. I think the agricultural growth could be revised upwards during the course of the year and most probably we could see the figure more closer to the 3% mark when the economic survey gets released in another two weeks. The monsoons this year was good apart from the north east monsoon. Also apart from wheat we have seen improved crop scenario in major crops. I still maintain that agricultural growth could be near 3% which would roughly add 6bps to the GDP growth.
According to me the big issue with India is not whether India can continue to grow at 8% or 9% but what is more important is that how inclusive is the growth. I have no doubt about the fact that we are into a secular growth trajectory and India largely insulated from the slowdown in G3. The reason I feel we are in a strong growth region is because of the strong domestic consumption in the economy. Indian domestic story is strong amongst the most of the developing economies. Domestic consumption account for nearly 70% of the overall figure. Also we are today a service oriented economy which means if there is a significant slowdown across the globe we would be less hit as the investment in the service industry is lesser than in manufacturing sector. Whereas China is more of a manufacturing story if we are going to face a global slowdown or a significant recession in US or EU it would be hit really badly as first there is huge investment and second it would lead to huge inventories for companies as China story has been about mass production.
My concern about Indian economy is about sluggish trend shown by the agricultural sector which has more than 74% of Indians dependent on it and also the growing rift between Bharat and India. If the growth has to be conclusive India it not only has to continue to grow above 7% but the agricultural sector has to grow above 4-5% and the big one been which I feel would make a big impact is India’s per capita income has to continue growing more than 15% per year. India’s per capita income is one of the lowest amongst all Asian economies the only ones below India been Bangladesh and Pakistan.
The other problem Indian government has is that 70% of the population is just contributing 18% of the GDP. The government has to reduce the burden if it wants to see inclusive growth otherwise there is very much likely hood of an unrest if the rift between the haves and the have not’s keeps on increasing. I don’t want to sound politically biased but for the first time I agree with the leftist that rise of the stock markets is not everything. Sensex at 20,000 doesn’t really mean anything for the aam aadmi because only 5% of the total savings flows into the Indian market. The aam aadmi is concerned about agriculture, about food, about better living. If there is a 100 bps increase in agricultural growth it adds nearly 18 bps to overall GDP but the long term implication to the GDP is more as it reaches far more people.
To me there are few big issues that Indian agricultural sector is facing and something government has to address. There is a serious need for the government to improve the quality of rural infrastructure. The government is already working on providing irrigation facilities but by just announcing either Rajiv Gandhi yojna doesn’t work. Firstly the roads have to proper so that we don’t lose goods in transit. Second the value chain has to be reduced and that is only possible by strong spot market with lesser middle men. Also the government has to work more aggressively on water conservation that will reduce the burden on irrigation.
To me there current blip in the GDP growth looks temporary as India grapples with the problem of plenty but with the deadly trio of PM, FM and Montek Singh working round the clock we have some aam aadmi friendly spos at hand before the election. The biggest problem that the trio faces are inflation and interest rates with the former in control interest rates should come down to acceptable levels. But I continue to reiterate that if we want the growth to be inclusive and if we want it to be sustainable we require agriculture to continue to grow at 4% for a sustainable period of time.
(The views expressed above are purely that of mine and my company has nothing to do with it.)
