When only the affluent benefit from high growth

NEW DELHI - Sale of passenger cars has now crossed one million. That, by any standard, is a landmark, especially if one remembers that the industry's expansion began only about two decades ago, when the government started collaborating with Japanese Suzuki Motor Company. Even in the mid-nineties, when several foreign firms were already in the market here, sale of five hundred thousand cars was deemed as an extraordinary development.

By From Kumaresh Chakravarty

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Published: Mon 19 Apr 2004, 12:08 PM

Last updated: Wed 1 Apr 2015, 11:52 PM

What is also noteworthy is that while cheaper cars constituted nearly 80 per cent of total sale until the early second half of the nineties, medium-price cars have occupied a much higher share of total sale today. Which shows that a significant section of car-buyers belong to income groups capable of spending more than what a low-end car costs, as also to maintain a car with smaller mileage per litre of oil.

Here then is a concrete example of the fact that India is 'shining.' But there are baffling questions. Who are these buyers? How large are they in number? What is the source of their income? Is the big rise in sale wholly due to large number of new buyers, or is a substantial proportion of sale due to a larger scale of replacement of old cars? It is not possible to find dependable answers to all these questions, mainly because the necessary data are not available. But, there are roundabout ways of estimating different numbers or identifying other relevant factors. That replacement demand is much larger today is beyond doubt. Simply because a car bought today has to be replaced after some time, say five to ten years, depending upon the user's willingness and ability to buy a new one. And, replacement demand keeps increasing with the increase in the stock of cars. So, replacement is one source of demand for new cars.

But new buyers must still be of a much higher proportion of the total sale in a year. The total demand, replacement and new demand together, comes from three sources: firms and other business entities, government, and households. There are ways of ascertaining that government demand cannot account for more than seventy thousand in this case. Business demand is and can run into two to three hundred thousand in a year of good profit and business expansion. That leaves more than six hundred thousand to be accounted for. That is the really difficult area since this number has to be bought by households. There again, a wide range of data lead to the conclusion that rural households cannot have bought even as many as two hundred thousand cars. We are then, left with the task of locating around five hundred thousand households who have bought a car each.

The National Council of Applied Economic Research (NCAER) estimates that there are a little more than half-a-million households earning Rs one million or more in a year. These buyers almost wholly to this income-group. An intelligent market analyst has raised this estimate to one million. The income of these households, he says, is equivalent to seven-to-eight per cent of India's gross domestic product (GDP), and their number has been increasing at 15 per cent a year. What is the source of their income? The analyst identifies the following sources: business or salaried jobs in information technology; 'knowledge' industries; and retail services in travel, food, healthcare, entertainment, arts and sports.

The analyst is thus conscious of the fact that upper income groups are now being produced by sectors other than manufacture, and mainly in some segments of the services sector. Besides, the estimated present number, one million, is just about half-a-percent of the country's total households. If they are earning as much as seven to eight per cent of GDP, then 99.5 per cent is earning the rest, or about 92 to 93 per cent. A substantial part of the current 'shine' of India is then due to this section. Surely there are others who are not as well off but are capable of buying a number of goods, which are now doing well.

May be, they are an additional five to ten million households, earning anything between a hundred thousand and five-hundred thousand rupees a year. Do some counting, and it will be clear that, together these households do not constitute more than eleven million or less than six per cent of all households. Whether even that number is growing as fast as 15 per cent, is highly debatable. Because, for that to happen employment must grow at a much higher rate than the current rate, which has already become an all-time low since independence.

No wonder, growth rates in the output or sale of a large number of manufactured products is much below that of some consumer durables. All consumer non-durables for example, have not been able to keep up a growth rate of five per cent, though the economy as a whole is expected to grow at eight per cent or more.

A senior television journalist cited some stark facts about poverty and asked the Prime Minister whether he believed the whole of India was shining. The Prime Minister could not have forgotten that 22 women and children had died in a stampede. Hundreds had come to collect a free sari promised by the friends of a BJP leader. So, the Prime Minister had to accept that at least some parts of India were not shining.

The problem is actually much deeper. When your output growth becomes substantially dependent upon demand from the affluent sections, then you must always create more and more such households for sustaining a minimum demand growth. Your policy priorities have to be adjusted accordingly. In case of an economy like India's at its present state, you cannot reconcile that with good employment growth or faster elimination of poverty. That perhaps explains why BJP's 'vision document' or election manifesto does not say that economic growth should first benefit the needy and the poor.

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