Indian Growth:Transportation Sector

India overtook China to become the worlds fastest growing major economy in the year 2015. For the year 2014-15, the country grew at a rate of 7.3%. The estimates for the year 2015-16 point to an even better growth rate of 7.6%. In an otherwise dull global economy, India is a bright spot.

India: The 21st century

gdp

The Indian growth story took off at the start of the millennium. Growth rates increased from the “Hindu Rate of Growth” to over 8%. In the years 2005-06, 2006-07 and 2007-08 the country’s economy grew at a rate above 9%. Strong domestic demand and favorable global economic conditions propelled this growth.

With the onset of the global economic crisis in 2008-09, growth rates fell to 6.8%, the Government of India unleashed a stimulus package to boost the economy, this involved measures such as agricultural loan waivers and tax exemptions. This coupled with low interest rates set by the Reserve Bank of India (RBI) stimulated the economy and pushed growth rates above 8% in 2009-10. But, all these measures were highly inflationary and high economic growth couldn’t be sustained beyond 2011-12.

The government had to cut expenditure to deal with a fiscal deficit which was spiraling out of control and nearing 6% of GDP. The RBI increased interest rates to try and control inflation which was at an annualised rate of 12%. There was also a need to tackle the current account deficit since it had crossed 6% of GDP, this led to the rupee depreciating by over 50% against the dollar. In addition to all of this, an unfavorable economic environment was created by measures such as the retrospective tax amendment in the country and corruption charges on the central government. All of this brought growth rates down and the economy expanded by only 5.1% in 2012-13.

Corrective measures were taken, which seem to have paid off and the country has recovered with inflation coming down to around 5%, fiscal deficit has fallen to 3.9% and current account deficit has fallen to just about 1% of GDP. This has led to a favorable economic environment in the country which has boosted the GDP growth rate to the highest among all major economies.

 

But questions have been raised on tag of “the worlds fastest growing economy”, multiple people have attributed this increase in the growth rate to the change in the methodology of calculating the country’s Gross Domestic Product. After the revision of the methodology in 2014, the country’s GDP growth rate for the year of 2013-14 was revised upwards from 4.7% to 6.6%. This would either suggest that the previous method was completely useless or that the new method has something very wrong with it. Thus, in this article I will attempt to look at how the country’s economy is doing from the transportation sector.

 

The transportation sector is one the most important sectors for a country’s economy, almost all economic activity is dependent on the transportation sector, be it manufacturing or services. Below are the four modes of transport and how they are performing in the Indian economy.

Automobile sector

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Above is a chart which shows the growth rate of domestic demand for automobiles in the country. The chart shows that automobile sales and the country’s growth rate is positively related.

Between the years 2003-04 and 2007-08, domestic auto sales, just like the GDP growth rate, grew rapidly, touching growth rates of 33% and 25% for commercial vehicles and passenger vehicles respectively.

For the recession years 2007-2009, domestic sales fell by nearly 5% in 2007-08 and grew by a meager 0.8% in 2008-09.

Growth in vehicle sales did recover to around 25% in the years 2009-10 and 2010-11, but this couldn’t be sustained. The reason for this recovery in growth rates was the fiscal and monetary stimulus of the government and central bank in response to the recession.

Domestic vehicle sales appear to have bottomed out post 2012-13. In the following years, the country has posted a modest growth rate for domestic vehicle sales. Commercial vehicle sales seem to be leading this recovery.

Aviation sector

air

The above chart shows the growth in air passenger and freight traffic. Once again, air traffic growth and GDP growth rates seem to be highly correlated.

During the high growth years before the recession, air passenger traffic grew at a rapid pace, peaking at a growth rate of 31.4% in 2006-07. Similarly, air freight traffic grew at a steady pace of around 10%.

Post the recession, air traffic growth recovered initially, but just like vehicle sales, this could not be sustained. Air passenger traffic registered a fall for the year 2012-13. Similarly, air freight traffic growth registered a fall for the years 2011-12 and 2012-13.

This fall in growth rates seems to have bottomed out in 2012-13 and growth has once again returned. Air passenger traffic grew at 17.6% in 2015-16, while, air freight traffic grew at a pace of 7% during this period.

Thus, steady growth appears to have returned for the past two years, and the tread suggests that the growth is increasing further.

Railways

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The above chart shows the growth rates of railway passenger and freight traffic in the country. The railways seem to have a very different trend when compared to automobile and air traffic.

Railway passenger traffic grew at a pace between 3% and 8% between the years 2003-04 and 2011-12. The impact of the recession was mild, growth rates fell from 8.6% in 2006-07 to 4.9% in 2008-09. Thus, unlike automobile and air traffic, rail passenger traffic growth remained positive even at the height of the recession.

Growth in passenger traffic started falling in 2012-13. In 2012-13, the government increased passenger fares after a period of nearly 10years. The fall in passenger traffic has continued and even in 2015-16 passenger traffic fell by 1%. But, the degree of fall in passenger traffic seems to have reduced since 2014-15, where passenger traffic fell by 2%.

Railway freight traffic, just like passenger traffic remained largely unaffected by the recession. Freight traffic grew in a range between 4% and 9% between the years 2003-04 and 2014-15.  At the start of 2015, freight rates were hiked steeply to improve the financial condition of the railways. Thus, we can see a sharp fall in freight traffic growth, with freight traffic growing by only 0.6% in 2015-16.

Waterways

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The above chart shows the growth rate in cargo handled by ports in India. The chart reflects a positive relation between GDP growth rate and growth in cargo handled by ports.

The share of shipping as a mode of transport in India’s world trade is 90%. Thus, growth in the shipping sector is highly dependent on global economic circumstances.

During the pre recession years, the shipping sector expanded at a pace between 11% and 14%, mirroring a similar growth in the country’s exports and imports as well as a high GDP growth rate.

The recession caused growth rates in the shipping sector to fall to 3%. Post the recession the shipping sector once again returned to a high growth rate for the year 2009-10.

Global economic circumstances were unfavourable in Europe starting 2010-11 due to the debt crisis, one of India’s major trading partners. This coupled with poor economic conditions at home, caused growth rates to fall further, reaching a level of 2.2% in 2012-13.

The fall in growth rates appears to have bottomed out in 2012-13, with growth rates accelerating in the following years. In 2014-15, growth in the shipping sector reached 8.1%.

In 2015-16, global economic conditions once again took a turn for the worse, with global trade contracting for mot countries including India, yet the county managed to post a growth of 4.3% in the year. This is a heartening sign.

 

Overview

Thus, we can see that all areas of the transportation sector (Automobile, Aviation, Railways and Shipping) grew at a healthy pace during the pre-recession years. The growth in these areas mirrored the growth in the country’s Gross Domestic Product (GDP).

During the economic downturn in India between the years 2011-12 and 2013-14, barring railway freight growth, all other areas in the transportation sector were adversely impacted.

Starting 2014-15, growth in the transportation sector seems to have picked up and growth rates in the aviation sector show signs of returning to the pre-recession levels.

Growth in the railways remains benign primarily due to the effort undertaken to improve the financial condition of the state-run behemoth. The mixed signals are due to multiple factors, one factor is the increase in passenger and freight rates causing a fall in demand. The other factor is the shift in consumer patters. The Indian railways has failed to modernize itself, thus, the average speed of a passenger train is a meager 77km/hr. (excluding stops), the average speed of a freight train is even lower at 25km/hr. Thus, passengers are switching to air travel or roads to save time, similarly, industries are switching to the roads or air to transport goods.

The shipping sector has been resilient even in the face of a downturn in global trade, this is an encouraging sign, showing that domestic demand for shipping remains intact.

Growth in automobile sales have been positive for the past 2 years, commercial vehicles sales has been leading this recovery. Thus, signs from the automobile sector are also encouraging. In addition, with a reduction in inflation, the central bank has reduced interest rates by 150 basis points (1.5%) since January 2015, this should help increase sales in the automobile sector due to cheaper loans for customers.

Hence, economic conditions have improved. But are the growth rates overestimating this improvement?

If we compare 2015-16 with 2004-05 where GDP growth rate was 7.5% (close to the current growth rate), automobile sales grew at 15%, air passenger and freight traffic grew at 21% and 20% respectively, railway passenger and freight traffic grew at 5% and 7% respectively and cargo traffic grew at 12%. These growth rates are much higher than what has been achieved in 2015-16.

Therefore, while there is no doubt that the economic conditions have improved in the country, the current methodology of calculating GDP growth may be over estimating GDP growth rate.

 

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