Excerpt from the Indian Economic Survey - Growth momentum to continue

Pre-Budget Economic Survey says it is yet another year of robust growth for the Indian economy, which is riding strong on the back of robust growth of the manufacturing and services sector and also some recovery witnessed in agricultural sector. With the above three engines running smooth for the Indian economy, India's GDP is projected to clock a growth rate of 8.1% for FY06.It must be noted here that GDP growth at constant prices in excess of 8% has been achieved by the Indian economy in only 5 years of India's recorded history. Of this, it has come about twice in the last 3 years.

It must be noted that an annual average growth rate of 8% had been envisaged in the Tenth Five Year Plan (FY03-FY07). While this target is unlikely to be achieved, considering that the average growth in the first four years of the plan has been 7% (owing to the mere 3.8% GDP growth in FY03), and if India has to achieve the 8% average, it would have to grow at 12% in FY07, the fact that India's GDP has indeed averaged 8% in the last three years is encouraging.

In fact, India would have had managed to achieve the targeted growth rate, but for the erratic monsoons, which has adversely affected the agricultural output. Despite this, the growth in GDP is commendable and this, to an extent, indicates the decreasing dependence on agriculture as the key growth engine of the Indian economy.

On the manufacturing front, the growth momentum has only gathered steam over the last few years from 7% in FY03 to a projected 9% in FY06. Within this, it has been the manufacturing and construction segments that have been at the leading end of this growth. While the manufacturing growth has steadily accelerated from 6.8% in FY03 to 9.4% (projected) in FY06, the average growth of the construction sector has been a strong 10.8% in the last four years (over 12% in the last couple of years). Substantive commercial bank credit flows to the housing, real estate and retail sectors continue to provide support to the boom in construction and consumer durables.

On the services front, the growth continues to be broad-based. While 'trade, hotels, transport and communication' as a segment registered double-digit growth rates (averaging 10.7% in the last four years), financial services also did its bit by clocking in an average growth of 7.8% in the said period.

A virtuous cycle of savings and investment, aided by the 'demographic dividend' that is a young, working population should take Indian economic growth closer to that posted by the East Asian tigers during the take-off stage. The challenge, according to the survey, is to put in place policies that will leverage Indian talent and enterprise.

The Economic Survey said data security and developing hardware sector were crucial to growth of BPO and Software sectors, even as it projected over three and half-fold increase in software exports at $60 billion by 2010. Though the contribution of software-BPO exports at $17.2 billion now accounts for five per cent of the economy and 14 per cent of the exports from the country, the potential for growth was still very high, the Survey said.

It praised the 'hands off' approach of the government in the IT sector as the reason for the industry's success and predicted that by 2008, the industry is likely to grow to seven per cent of GDP and account for 35 per cent of total exports. At present, software-BPO exports contribute to five per cent of the GDP and 14 per cent of the total exports. But these are under-tapped figures, the Survey observed.

'India accounts for 65 per cent of the global market in offshore IT services and 46 per cent of the global BPO market in 2004-05. With only 10 per cent of the potential market tapped so far by all the countries put together, the potential for further growth is very large.

'With annual growth of over 25 per cent, these two can generate export revenues of 60 billion dollar by 2010 and studies show that the growth will be driven by more traditional services like hardware and software maintenance, network administration and help desk services', it said.

'Some of the key challenges which need to be overcome include documenting procedures and establishing performance benchmarks, addressing concerns around data security, improving the workforce quality and skills', the Survey pointed.

It expressed concern at the slow uptake of IT in the domestic market, which has led to an under investment in IT capital. Globally, 10 per cent is the critical share of IT capital in total capital that separates invested from under invested economies. India's share is only 3.5 per cent and is among the lowest. Personal computer penetration is about seven per 1,000 people, which is less than an eighth of the average in other IT-under invested economies and a fourth of that in China.

The Survey is worried over the fact that within IT, relative to software and services sector, IT hardware has lagged far behind. 'One of the reasons for the under-investment in IT sector is the slow development in hardware sector. With the implementation of ITA1 agreement in April 2005, there are zero duties for items under ITA1 and greater global competition for the hardware sector. 'IT production development has to focus on the combined hardware-software sector', it said.

'The Economic Survey asked the software sector to be on its toes as achieving high growth in software exports will require deep and enduring innovation across multiple dimension like business model innovation, focusing on new services like infrastructure off-shoring, developing Internet Protocol based solutions.'

To conclude, going forward, while the increased contribution from the industry and services sectors in India's GDP growth instils faith in the growth of the Indian economy, the fact that a large population of the Indian economy continues to be dependent on monsoons for a good living cannot be overlooked.

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