India’s gamble with services

August 05, 2014 09:26 am | Updated 10:57 pm IST

One remarkable feature of India’s recent growth is diversification into services, with the services sector dominating GDP and its increases. According to the CSO’s National Account’s Statistics, the services sector which contributed 53 per cent of GDP in 2004-05, accounts for as much as 56.3 per cent. The recently released Economic Survey 2013-14 noted that: "India has the second fastest growing services sector with CAGR (compound annual growth rate) at 9 per cent, just below China's 10.9 per cent, during the last 11-year period from 2001 to 2012." The Survey sees the services sector, which recorded a marginal deceleration of growth in 2013-14, as poised for revival and as being an important contributor to growth in the future as well. "With a stable government in place and growing optimism which could translate into investment and growth, some quick reforms and removal of some barriers and obsolete regulations in the services sector could help,” it said.

This celebration of services growth is intriguing. Given the historical experience with the diversification of economies at different levels of per capita income, a sharp rise in the share of services should be considered an aberration. The diversification away from agriculture in terms of sectoral shares in national output is expected, at India’s level of per capita income, to result in a predominant shift towards manufacturing rather than services. A premature increase in the share of services would be an aberration because services are conventionally seen as activities characterised by lower levels of productivity and lower rates of increase in productivity.

Though India ranks low in terms of per capita income, its share of services in GDP is approaching the global average. Interestingly, however, the contribution of services to employment was significantly lower than the world average. As the Economic Survey noted, while at the global level services accounted for 65.9 per cent of GDP and as much as 44 per cent of employment in 2012, in India’s case the sector, with 56.3 per cent of GDP, accounted for just 28.1 per cent of employment. This would imply that the relative per worker value added in services vis-à-vis the commodity producing sectors and construction, was higher in India than elsewhere. In fact, “for the top 15 countries (in terms of services GDP), except India and China, the shares of both services GDP and services employment are high and close to each other.” China, a manufacturing success, is different with the shares of both services income and services employment being low.

There are two kinds of reasons adduced to explain why India is experiencing this unusual (and supposedly virtuous) growth in service. The first is that it is modern services like financial services, software and information technology enabled services, communications services, business services, education services and health services and productive services like transport, storage and communications that account for the bulk of the services sector. This is seen as rendering the privileging of manufacturing over services unwarranted in India’s case.

Second, India’s success in software and IT-enables serviced (ITeS) exports, has made it a significant services exporter with its share in world services exports rising from 0.6 per cent in 1990 to 3.3 per cent in 2013. Since this India’s services growth has been led by software and IT-enabled services, seen as knowledge and technology intensive services, some have argued that services growth is expanding the knowledge economy, and reflects a new kind of dynamism.

How true is this description? Definitionally, knowledge and technology intensive services (KTI services) are broken down into “market oriented” services (such as financial services, business services and communication services) and “non-market oriented” services (education and health). A calculation based on the National Accounts Statistics prepared from the Central Statistical Organisation (CSO) indicates that the set of services sectors that could be identified as “modern services”—banking and insurance, education, computer related services, research and development, health, communication, legal services and accounting—together accounted for only 16.6 per cent of GDP in 2012-13. Add on public administration and defence and the railways and the figure rises to 23.3 per cent. That still leaves well more than half of services GDP, amounting to 30 per cent of total GDP, unaccounted for. Trade, dominated by the retail trade alone accounts for 16 per cent of GDP. This makes the argument that services are reflective of a new dynamism in India that much less convincing.

In this connection, a set of estimates produced for the US National Science Foundation (National Science Board 2014) by global consulting firm Global Insight on value added revenues (gross sales revenue minus the purchase of domestic and imported supplies and inputs from other industries) generated in the knowledge-intensive services sectors is of some interest. According to the data, over the 15 years between 1997 and 2012 in India, the share of commercial or “market-oriented” knowledge and technology intensive services in GDP rose from 9.9 to just 12.6 per cent. The share of Financial Services in GDP rose from just 5 to 5.6 percent and that of Business Services from 3.6 to 5.7 per cent, while that of telecommunications services stagnated at 1.3 per cent. In fact, CSO data also indicate that the share of communication services in GDP in in 2011-12 was only 1 per cent.

Thus, while modern services do play an important role in the Indian economy, so do traditional unorganized services, which are known to be characterized by extremely low earnings, and which grow because of the inadequate employment opportunities in the primary and secondary sectors, especially those providing a reasonable wage and decent work conditions. Yet tertiary sector employment in 2009-10 amounted to only 25 per cent of the work force despite the fact that around 55 per cent of GDP came from this sector. This was possibly because low wage employment in traditional services that contributed employment but little in terms of GDP growth combined with high productivity services that delivered substantially in terms of revenues but very little in terms of employment.

A typical example is the IT sector, the contribution of which to employment does not compare with its role in the generation of income and foreign exchange. Going by NSS figures, employment in Computer related activities (Category 72 of National Industrial Classification), accounted for 0.4 per cent of the work force in 2009-10. If we consider the group including categories 65 to 74 which covers all business services including Financial intermediation, and Real estate, renting and business activities, the share of employment in that sector is just 2.2 per cent. These shares are far below the corresponding GDP shares. Despite the persistence of a range of informal low productivity services, the responsiveness of employment to GDP increases in services is also low. In this sense too services-led growth falls short of the country’s needs.

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