Why the 8% growth story is here to stay

NEW DELHI: Is the growth that the Indian economy has been seeing of late (7-8% annually) just a flash in the pan - as it was in the mid-1990s - or is it here to stay?

After growing at  7% plus for three years between 1993-94 and 1996-97, the economy slowed down to 4.7% in 1997-98 and stayed at between 3% and 6% till 2003-04 when it surged back with 8.5% growth.  In the year after that, we have seen 7.5%  growth, with this year promising 8.1%, according to advance estimates of the Central Statistical Organisation (CSO)?

While politics can always mess things up, few economists are really fretting about a slump similar to the late 1990s. “There is no need to be apprehensive that the 1990s experience will be repeated,” says Abheek Barua, chief economist, ABN Amro. The quality of growth, most economists say, is much better this time around, fuelled as it is by robust consumer and investment demand, both feeding into each other.

The 30% growth in gross capital formation (GCF) in the private sector in 2003-04 and 28% in 2004-05, and the 33% growth in gross fixed capital formation (GFCF) in machinery and equipment in both the years is, indeed, looks quite similar to the situation between 1994-95 and 1996-97, which saw between 20% and 50% growth rates in these areas. The GFCF is an indication of investment in tangible, productive assets, which will have a spinoff effect on the rest of the economy.

But such investments couldn’t be sustained in the mid-1990s, because demand petered out.  In retrospect, it can be said that the boom was largely investment-led. 

The demand surge that started in 1993 was the consequence of the economy having just been opened up, explains Surjit Bhalla, principal, O[x]us Investments. “The lid was taken off a pressure-cooker kind of environment and an explosion was inevitable.” But once the steam was let off, things cooled down.

Demand depends on incomes and the per capita income then ranged between Rs 8,815 in 1994-95 and Rs 11,965 in 1996-97. High incomes - and, consequently, spending - were also restricted to certain groups of people, mostly in urban pockets, DH Pai Panandiker, president, RPG Foundation, points out. People spent their accumulated money, and once that got over, incomes did not support demand.

That’s where the big difference is this time around. There’s more income to buy things. Per capita income has been close to Rs 20,000 since 2002-03, as the latest advance estimates of national income also confirm. The National Council of Applied Economic Research’s (NCAER’s) Great Indian Middle Class (GIMC) Survey also shows a substantial rise in the number of households across income categories.

The NCAER survey, which has bunched households into eight broad categories, ranging  from under Rs 90,000 per annum (the “deprived” sections) to those earning over Rs 1 crore, shows healthy growth in numbers in all categories except the “deprived” one. In other words, the middle and upper classes are growing much faster than the deprived, though there is some absolute growth in numbers even here (See chart). And these categories are expected to grow faster than the really poor.

Demand, therefore, is more broad-based. “The demand now is a gradual build-up, not a sudden spurt, as it was in the 1990s,” says Panandiker. Marketing consultant Harish Bijoor seconds that and is confident that the current consumer demand is not a temporary phenomenon which could go bust. Most of the prosperity now, he notes, is coming from the services sector, which is on a roll. “This gives me a greater deal of happy feeling and solidity. I get worried when the incomes come largely from the old economy and the stockmarket. That’s a blind call for a temporary period.”

All this is translating into increased spending, which is also spread across income categories and regions. Dabur India CEO Sunil Duggal admitted as much at a videoconference with analysts after the last quarter’s results: “Unlike the last two or three years where demand was significantly from the urban markets and rural demand was stagnant or even declining, this year we have seen significant upsurge in demand from rural areas.” Agrees Bijoor: “There’s a great gung-ho feeling on the rural demand front.”

Consumer demand is being augmented by access to credit, especially for asset purchases like homes. The share of personal loans in total bank credit has doubled from 10.5% in 1997-98 to 20.3% in 2003-04. Within that, the share of housing loans in total bank credit has increased from 7.2% to 10.1% over the same period. Even though there is talk about the American consumer boom - also fuelled by the consumer and housing surge — going bust, there doesn’t seem to be any danger of that happening in India, even with interest rates beginning to harden. Rating agency Crisil has said that the housing boom stems from genuine demand and isn’t only interest-rate driven.

Equally interesting is the composition of spending, with the declining or stagnant share of basic roti, kapda and makaan in total consumption expenditure, and the increasing share of manufactured and higher value goods. That’s what is making a difference to industrial activity this time around.