Farm sector makes up for manufacturing slowdown

Written by Economy Bureau | New Delhi, May 30 | Updated: Jun 1 2008, 02:54am hrs
At a time when rising prices were choking the spirit of people and the government, the economy growth figures came as a pleasant breather. Indias gross domestic product (GDP), or the overall domestic income, grew at an impressive 9% in 2007-08 as the agriculture sector expanded at nearly double the rate of original projections, overshadowing the slowdown in the manufacturing sector.

The rise in per capita income, which grew at 7.8% to Rs 24,321 in 2007-08would surely cheer up faces staring at spiralling inflation, which is becoming almost uncontrollable. While the upwardly revised growth estimate of 4.5% from the previous 2.6%for agriculture and allied sector surprised analysts and government officials alike, the estimated slowdown in the manufacturing sector remains a cause of worry.

The manufacturing growth rate estimate has been lowered to 8.8% from the initial estimate of 9.4%, while the projections for services sector continued to remain buoyant. But increasing investment rate turns out to be a silver lining in the dark clouds of manufacturing world. Investment as a proportion of GDP grew at 33.9% in 2007-08 (at current prices), up from 32.5% growth rate in 2006-07.

The stock markets reacted positively to firm GDP numbers even as the high inflation rate, which hit a 45-month high of 8.1% for week ending May 20, dampened upward momentum of the benchmark index Sensex. The BSE 30-share Sensex moved in a range of 16,540.49 and 16,314.99 before ending the day at 16,415.57, a rise of 99.31 points or 0.61% from previous close of 16,316.26. Similarly, 50-share S&P CNX Nifty of NSE rose by 34.80 points to 4,870.10 from last close of 4,835.30.

The expansion of the agriculture sector has primarily led to the upward movement in the GDP growth at 9% in 2007-08. The Central Statistical Organisation, which released the revised estimates on Friday, has earlier estimated the economy to grow at 8.7%.

The 9% GDP growth in 2007-08 is higher than expected and is basically because of the better than expected growth in agriculture. It does not change the perspective on other sectors. The decline in manufacturing growth to 8.8% from the initial estimate of 9.4% comes as no surprise, Standard and Poors (Asia Pacific) chief economist Subir Gokarn, said. He said the slowdown in manufacturing was unlikely to reduce the investment level in the economy. Investment is not really going to be so short-term driven. In the long term, investment should not really go down unless it is because of other factors. For instance if the cost of construction or the cost of capital goods increase, it will deter investment. Also if inflation stays at this rate, the growth rate will slow down and then it will affect the investment climate, he said.

Analysts expect the economy to expand at around 8-8.5% in 2008-09. Finance minister P Chidambaram expressed confidence the economy will expand at a pace not less than 8.5% in the 2008-09 fiscal year, and with some luck at 9%, the same clip as the year before.

Saumitra Chaudhuri, economic adviser to rating agency ICRA, said: With high inflation, growth tends to fizzle out. I doubt if GDP would grow at 8.5% this fiscal, and I expect it to be closer to the 7.8% forecast by me. But if after October, inflation and other international factors cool down; growth may be better and touch 8.5%.

Although applauding the growth estimation for the agriculture sector, the finance minister expressed concern over its sustainability. Despite doing well in agriculture, we are still not sure whether we can sustain growth of 4%, Chidambaram said at a seminar organised by industry chamber Assocham.

However, some analysts argue that this growth can be sustained and the Rs 71,680-rore farm loan waiver would help boost investment in the sector. Agriculture production has increased substantially and there has been record food grain production, especially of rice, wheat, maize, cotton and pulses. When production increases, there will obviously be higher growth in the agriculture sector, notes PK Joshi, director, National Centre for Agricultural Economics and Policy Research.

We expect the agriculture sector to grow at close to 4% in 2008-09 as well and may even go beyond it, especially because of the farm loan waiver. With farm debts being waived off, many farmers will be able to take new loans and invest more into agriculture. This should trigger further growth, Joshi adds.

Meanwhile, the industry chambers expressed concerns that tight monetary policy and high interest rates were hurting the manufacturing sector. The impact of hardening interest rate has been severe on industrial production especially on the consumer durable sector, Confederation of Indian Industry said on Friday. Ficci suggested a review of interest rates to encourage the growth of the sector.

Sector-wise, while growth rate of the transport, communication, trade and hotels sector declined to 12% from the earlier estimate of 12.1%, electricity and gas supply activities growth rate decelerated to 6.3%, against 7.8% projected earlier. The construction sector, however, grew marginally by 9.8% as compared to earlier estimate of 9.6%. Besides, the financial services sector, including insurance, real estate and other services also registered a slight increase to 11.8% as compared to 11.7% projected in the advance estimates.