Macroeconomic Developments in India

I posted sometime back about useful reports from RBI on Indian Economy and had said would try and summarise the findings. I have so far read only one chapter on Real Economy (which perhaps is the most important one) and here it goes:


1. The primary concern is the slowdown in agriculture sector. The growth in 2006-07 is expected at 2.7% lower than 6.0% seen in 2005-06. Whereas, both Indsutrial Sector and Services sector have grown at faster levels in 2006-07 compared to 2005-06. Industrial grew at 10.2% higher than 8.0% and services at 11.0% higher than 10.3%.

2. Overall the growth in economy at 9.2% in 2006-07 slightly higher than 9.0% clocked in 2005-06.

3. Share of services in GDP has been increasing consistently. It was 60.2% in 2004-05, 60.9% in 2005-06 and is at 61.9% 2006-07. Share in agri has fallen from 20.2 in 2004-05 to 18.5% in 2006-07. Share of Industrial Sector is consistent around 19.4% – 19.6%

4.The Industrial Sector is divided into 3 sub-sectors: Mining & Quarrying, Manufacturing and Electricty. All three have grown over 2005-06 with mfg growing at 11.3% compared to 9.1% seen in 2005-06.

5. In Services, Construction has slowed from 14.2% to 9.4% whereas hotels etc have increased by 13.0% in 2006-07 from 10.4% in 2005-06. Reasons for latter growing comes from 2 statistics: a) passangers handled at domestic terminals which increased from 22.9% in 2005-06 to 36.4% in 2006-07 and b) Tourist Arrivals increased by 12.1% in 2005-06 and by 14.4% in 2006-07.

The reason for agriculture is primarily monsoons (what is new?). For the uninitiated (which included me till now) we have 2 monsoons here which help in two crop season.
a) South-west Monsoon (which is June-Sep of which all Mumbaikars are scared of) helps in Kharif crop- rice, oilseed,cotton, sugarcane etc. Coarse cereals are Bajra, Jowar, Maize.
b) North-East Monsoon (which is Oct-Dec)- helps in rabi crop- wheat, rice etc. Bajra, Sugarcane and cotton are not produced in this season.

Rice is produced in both the seasons but majorly in kharif. Cotton and Sugarcane are produced only in kharif. Rabi season is very crucial as wheat is produced in this season.

In 2006 South-West Monsoon was normal but North-East monsoon was almost 21% below expectations. So what would you expect? Rabi crops to do badly isnt it? Which is exactly the case.

Infact, if you look into the numbers a bit in detail, in most of the crops the targets for 2006-07 have been missed and in some by big margins- Coarse cereals by 10%, Pulses by 7%, and oilseeds by a whopping 21%. The missing figure for wheat and rice is 2%. Only in Sugarcane and Cotton the actuals are much higher than targets.

Looking at acreage for a crop:The acreage has fallen for oilseeds, rice and coarse cereals so we can undersatnd the fall in production of the same.
Acreage has increased in wheat, pulses, sugarcane and cotton. We see an increase in sugarcane and cotton as rains have been in normal in south-west monsoon but as rains have not been good in north-east monsoon, we see a fall in wheat despite the increase in acreage. But in Pulses, the fall has come maximum in kharif season when the rainfall was normal. So, Pulses as a group has failed to perform.

So, it is not difficult to see why prices of food and related items have been rising and may continue to rise. It is basics iof economics.

Industrial Growth is reported via Index of Indstrial Production which comes every month with a lag of 2 months. Now as I explained it is divided in 3 sub-sectors:
1. Mining and Quarrying
2. Manufacturing (which is further sub-divided into 14 groups like Chemicals, leather etc.)
3. Electricity, Gas and Water Supply

Further the data is also divided on the basis of usage i.e.:
1. Basic Goods- iron, coke, diesel etc.
2. Intermediate Goods- bolts and nuts, gearboxes, furnace oil etc
3. Capital Goods- Boilers, machinery etc
4. Consumer Durables- typewriters, wristwatches, cars, bikes etc.
5. Consumer Non-Durables- biscuits, toothpaste etc.

Infact there has been unprecendented growth rates in Basic goods, Capital goods and consumer goods sector. The growth levels have been higher every year compared to previous year since 2001-02 in each of these sectors and hence we have seen robust growth in overall indstrial sector year after year.
Only in intermediate goods (IG), the growth has been topsy turvy. But in 2006-07, IG is also showing a double digit growth.

In 2006-07, the trend is similar and we have higher grwoth rates in basic and capital goods sector. However, there is a slight slowdown in consumer goods sector.

In a nutshell, Industrial sector looks quite good as of now.

I have already summarised above.

In a nutshell
So you get the whole picture? Agriculture forms the main input for many industries and former has not been performing well. Hence, we would see pressure on industry as well as input costs would increase and this raises costs.

With high competition, it is not easy to pass on the prices to the consumers unless all or most of the players in the industry agree to pass on the prices. But as we have been seeing prices in most products have been increasing and hence we have inflationary pressures which we have been seeing for quite sometime.

So, overall things look good but with such an unprecedented growth for so many years it seems the pressure to catchup with previous growth is showing and we should expect a slight cooling in the economy.

Comments are welcome.

2 Responses to “Macroeconomic Developments in India”

  1. Madhav Mehta Says:

    nicely summed up. Thanks.

    Best Regards,

  2. M.A.Pai Says:

    Is the income from IT outsourcing included in GDP? With a poor electric sector I am wondering how the GDP growth is 8%. London Economist says unless India adds 20 GW per year it is not possible to have a sustained growth of 8%

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