India’s three-tiered economy needs bottoms-up approach

Has finance minister Arun Jaitley got it right? If one looks at the economy at hand, the answer would possibly be “Yes”.  

India is now a three-speed economy. 

Double-digit growth is confined to a section that comprises sectors such as e-commerce, travel and stock markets and accounts for 30 per cent of the GDP. 

Another section comprising mainly industries, which also accounts for 30 per cent of the GDP, is growing in single digits. 

And a third section, comprising primarily agriculture and construction, is clocking negative growth. Arun Jaitley’s 2016 Budget targets the bottom and middle rungs.

In this backdrop, were the architects of the trickledown theory to visit today’s India, they would probably advocate a “trickle-up theory”. 

Having long believed that demand can be augmented by boosting industry and trade, which in turn extend employment and earnings to the lower strata, they will now have to consider that economic growth can also move in the opposite direction — from the bottom to the top.

Some fresh studies based on GDP data, including the one by Mumbai-based market research firm Ambit Capital, help us better understand India’s three-speed economy.

The fastest runners are transport (especially aviation), hotels, commercial property, e-commerce and business services, although increased cess in the Budget has made hotel stay and air travel costlier. 

It is noteworthy that commercial property is in demand despite the general downturn in the construction industry. 

Similarly, despite a slowdown in the consumer goods market, e-commerce is buzzing. Venture capital and private equity and other high-income investors fund this.

The second section, which grows at medium speed, includes automobiles, manufacturing and mining sectors, according to brokerage studies. The numbers indicate that there might be modest growth in parts of the manufacturing sector as some areas show stability. 

However, the automobile cess might be a dampener. Ports and railway freight transport have logged stable growth in the previous two quarters.

Farming, housing and infrastructure, administrative services and banking make up the third section, which shows zero or negative growth. 

The failure of three consecutive crops has led the rural wage growth rate to go down to -5.5 per cent from 13.7 per cent in 2013-14. For banks, profits and credit demand have dwindled. 

At the same time, the demand for cement and steel has not picked up due to sluggish investment in infrastructure and cuts in government spending.

In construction, the rise in unsold inventory and the stagnation in property prices indicate a burst of the real estate bubble. With agriculture, construction and manufacturing, the three largest sources of employment, growing slowly or in deep recession, growth in employment and earnings too is suffering.

India is facing this three-layered economy for the first time and it has brought with it the most intriguing challenge of maintaining growth in one section, increasing growth in the second, and resurrecting the third. 

In the choice between accelerating the already racing sectors and tackling bottomline recession directly, Jaitley has decided to pick the latter in this Budget. He is back to fundamentals and sensibly refrained from going overboard. Now, everything boils down to implementation.