It is rare for the Reserve Bank of India to make very definitive and even partisan statements about the broad contours of economic strategy. Central bank reports are normally fairly staid documents, attempting to present balanced if boring analyses of economic trends and policies. Over the past decade, as the other official economic publications have tended to be like publicity hand-outs for the government rather than objective assessments of the state of the economy, the RBI's publications have been more circumspect.

All that seems to be changing, along with so much else in economic institutions in India. The latest Currency and Finance Report of the RBI (officially referring to 2001–02 but published in April 2003) is for the first time organized around a theme: no less than an assessment of the economic reforms programme of the Government of India since 1991.

It is a bold attempt, and certainly valuable, given that it comes from this particular official quarter. The foreword (by RBI Deputy Governor Rakesh Mohan) and the opening chapter (on the theme of the report) give some indication of the underlying bias: 'The country has gained significantly from policy reforms in the 1990s. Further gains are there for the taking.' (pages I–3)

While it may be unusual for an official document to so openly wear its heart on its sleeve, it must be said that the subsequent chapters are much more carefully worked and worded. The various chapters present surveys of the literature and assessment of the team of writers, as well as a set of data pertaining to trends in the real economy, fiscal and monetary policy, the financial sector and the external sector.

Of course, there are major gaps and limitations even in the presentation of the broad trends. Thus, the entire report contains no mention of employment trends, as if employment is not and need not be a central concern of macroeconomic policy. Similarly, the report tends to uncritically accept the disputed argument that there has been a dramatic decline in the incidence of poverty, which is based on non-comparable consumption surveys conducted by the NSSO. Nevertheless, there is much in the report that provides an interesting and useful account of the economy under neo-liberal reforms.

Much of the trend analysis is conducted by comparing the pre-reform decade (here defined as 1982–82 to 1990–91) and the post-reform period (1992–93 to 2002–03), thereby excluding the 'crisis year' 1991–92 from the calculations. These data themselves tend to give the lie to the more optimistic assessment of the reforms that is presented in the overview chapter of the report, since they reveal a number of weaknesses even in the aggregate growth patterns.

In this edition of Macroscan, we focus on the evidence presented in the report on real economic growth, and consider the experience thus far with sectoral growth performance, as well as the underlying reasons for such performance.

To begin with, very recent trends in the economy suggest that economic activity has not only decelerated but is far below potential. Chart 1 shows that there is clear indication of deceleration in aggregate growth of GDP, despite fluctuations, in the last three years. This has been led by the poor performance of agriculture and allied sectors, but industrial growth also appears to be low over the recent period. Indeed, only the services sector shows relatively high growth rates, and even those have decelerated over the last three years.

Chart 1 >> Click to Enlarge

This is related to the deceleration in investment ratios, evident from Chart 2. There has been a long-run tendency for savings and investment rates (as shares of GDP) to increase, reflecting the usual pattern in industrializing economies. However, this tendency appears to have come to a halt by the mid-1990s, and, by the early years of the current decade, the investment ratio had settled at between 23 and 24 per cent. More disturbing, the savings rate actually exceeded the investment rate in 2001–02 (and most probably also in 2002–03, for which the NAS data are not yet available).

Chart 2 >> Click to Enlarge

This is an indication of the extent of slack in the economy, the aggregate unemployment and under-utilization of capacity. There is no question that the economy is operating well below potential, and the RBI also accepts this diagnosis. However, the RBI's own estimates of the potential income and the output gap are not based on the full deployment of existing resources. Rather, potential output is defined by some notion of 'structural factors' such as 'the lack of appropriate (undefined) reforms in the agricultural sector, infrastructure rigidities, labour market rigidities, weak bankruptcy and exit procedures’, which suggests that it is also operating within the narrow conceptual confines of the liberalizers.

The trend analysis of GDP confirms the picture of deceleration, especially over the most recent period. The RBI has calculated semi-logarithmic trend rates of growth for the relevant periods. While the trend growth rate of aggregate GDP is estimated to have increased from 5.6 per cent over 1981–82 to 1990–91, to 6.1 per cent in the period 1992–93 to 2002–03, this masks very differential performance across sectors. In fact, as Charts 3 to 10 show, both the primary and secondary sectors, as well as some important tertiary sectors have experienced deceleration of growth along with much greater volatility of growth as expressed in the coefficient of variation.

The sharpest deceleration is observed in agriculture, as apparent from Chart 3. It is worth remembering that the primary sector's long-run trend rate of growth since independence has been 3 per cent, and the post-reform period marks the first phase when it has actually fallen well below that. Indeed, this low rate of growth reflects the stagnation or even decline of agriculture in the more recent period, as we will discuss below.

Chart 3 >> Click to Enlarge

It is true that this lower growth of agricultural GDP has been associated with lower volatility as well, but that reflects the tendency to stagnation especially in the latter part of the period. The report provides insufficient attention to the causes of this, and tends to underplay one of the more important aspects that has affected value added in agriculture (as opposed to gross production)-the impact of trade liberalization in keeping down many crop prices even when domestic output falls.

Mining and quarrying is clearly one of the sectors that has been adversely affected in the last decade. Chart 4 shows that GDP growth in this sector has decelerated; meanwhile, there is also much greater volatility of such growth. The coefficient of variation of GDP in this sub-sector was as high as 85 per cent in the latter period.

Chart 4 >> Click to Enlarge

Manufacturing is more crucial to the Indian economy, and therefore it is disturbing to see from Chart 5 that the same tendencies are operative for this sub-sector as well. Deceleration of output growth has been accompanied by increased fluctuations, and it will become apparent that this is related to the even sharper slowdown in manufacturing in the latter part of the period.

Chart 5 >> Click to Enlarge

This was accompanied by substantial slowdown and similar increase in volatility of the infrastructure and utility sectors, that are so important for manufacturing growth as well-electricity, gas and water supply (Chart 6).

Chart 6 >> Click to Enlarge