Indian Economy: Overserviced?

The latest Economic Survey of India indicates that India has the 2^nd fastest growing service sector in the world, second only to China. Over many past years the service sector has been championed as the cause of India’s fast economic growth.

The share of the tertiary sector has grown very rapidly, making India a ‘tertiarized’ economy- an economy in which the tertiary or the service sector dominates the primary and the secondary sector. Despite having an income level of a low middle income country, the share of the service sector in GDP in India is close to that of a high income country. Second, the service sector grew rapidly as compared with other countries.

India underwent a major economic policy overhaul in 1991- including policy reforms in external sector as well as domestic economy sector. As far as the reforms in the service sector are concerned, there was no separate policy package for the service sector per se. Unlike the secondary sector, the service sector did not get any comprehensive set of policy changes. However, the overall changes in policy regarding deregulation, opening up of FDI and privatization of services previously owned by government were important to the growth of service sector.

The employment in the service sector is very low. Thus some scholars have dubbed Indian economic growth as ‘jobless growth’ (Bhattacharya and Sakhtivel 2002). The service sector, which is recently the fastest growing sector, makes up the biggest part of the GDP, but employs only 28 percent of the population. Thus, the service sector is a “major economic sector” but a “minor contributor to employment” (Papopla 2005).This feature distinguishes India from other developing countries in Asia, where the share of services in total output and in employment match more closely (Papola 2005; Banga 2005).

            In addition to the differential patterns in the sectoral output, the patterns in employment across sectors in India are different as well. The service sector in India employs a lot less people than the service sector in other developing countries. Thus it has been less ‘employment intensive’ as compared to other countries like China and Indonesia. In China and Indonesia, the share of service sector in output was similar to the service sector’s share in employment. For example, according to Table 2.4, in 2002, China’s service sector contributed 34 percent to GDP, and employed 31 percent of the labor force. Indonesia’s tertiary sector contributed 38 percent to GDP and employed 39 percent of the labor force. In contrast to this, India had only 22 percent of its people employed in the service sector, which produced 51 percent of the output (Papola 2005). This is different from the historically observed patterns in structural changes employment that accompany sectoral changes in output. Some possible reasons responsible for slow growth of employment in the service sector. The author mentions that some services such as community, social and personal services that have grown faster and have relatively higher contribution to the GDP have experienced a fall in employment elasticity. Also, sectors like the telecommunications and software services which are growing fast have higher labor productivity and therefore less employment growth.

Various scholars have analyzed the reasons for such rapid growth in the Indian service sector argues that demand side factors like high-income elasticity of demand for final product services, and structural changes in the manufacturing sector, have led to such a fast growth of services. Also, supply side factors like economic liberalization, improvements in technology and higher foreign investment in the service sector might have boosted the growth of the tertiary sector. claim that splintering and high foreign demand may be possible contributors of rapid service sector growth.

Dr. Jane Goodall

How enthralling it is to indeed see a person- whom you have read and admired all your life- up close and listen to her talk right in front of you? I guess only the tears of joy and gratitude can give expression to such an overwhelming feeling. It is exactly what I experienced when I attended primatologist Dr. Jane Goodall’s speech last week.

Since my childhood, in the nooks and corners of my earthy mind, I coveted seeing and meeting Jane Goodall. I was about 8 years old when I first heard about Jane and her seminal research on Chimpanzees. At home, we were not so much of the ‘pet’ people but loved to see and read about animals in the wild and nature at its home turf. A movie named ‘Gorillas in the mist’ about the life and works of another primatologist- Diane Fossey had just released then. My parents discussed the movie at home. Jane being in the same field of primates’ research was an obvious part of the discussion and so I was introduced to Jane’s work and life.

Back in her childhood Jane loved animals and carried a dream of going to Africa.  In those years Africa was mostly unexplored and faraway continent. Being a female and not having enough money, visiting Africa was a distant dream for her back at home in England. However, her mother encouraged Jane to pursue her aspirations. Luckily, Jane’s friend invited her to work on a farm in Kenya. There one day she met Dr. Louis Leakey- the famous anthropologist and paleontologist- in the natural history museum and then on started working as his secretary. Looking at Jane’s interest and knowledge about animals Dr. Leakey encouraged her to study the wild chimpanzees in Gombe National Park in Tanzania and thus began Jane’s kinship with the Chimps.

When the world believed that only the human beings were capable of making tools, Jane made a breakthrough observation. She had seen a Chimp using a stick to fish termites from their mound. This revealed that even Chimpanzees were capable of making tools. Upon this, Dr. Leaky made his famous remark “We must now redefine man, redefine tool, or accept chimpanzees as humans!” In addition, she discovered that Chimpanzees too had complex social, familial and emotional behavior structure just as we humans do. Jane was often criticized in the field for being emotionally attached to her subjects and naming them. While documenting Chimp’s violent and aggressive behavior, she also discovered that Chimps were not entirely vegetarian as was commonly thought in those times. Jane spent almost 50 years in forwarding the research on Chimps. She worked vigorously against the bush meat trade and illegal poaching of wild chimpanzees. Among various honors and accords which she received for her seminal work, Dr. Jane Goodall was appointed as the United Nations Messenger of Peace in 2002. Now her work on conservation and sustainable development continued through the ‘Jane Goodall Institute’ and the ‘Roots and Shoots’ program.

Today the world is torn between insatiable human avarice and natural resource depletion. When we doubt quality of the very air we breathe and the food we eat, Jane offers us optimism. She says that young children, human brain that works in harmony with a compassionate heart, resilience of the nature and indomitable human spirit are our hopes for a better sustainable future. It is not too late yet to save our dear mother earth. Let us take inspiration from legends like Jane and do our bit. Thereupon when we put our children to sleep at night, we can assure them with a head held high, that we have not compromised their future.

Manufacturing's the key

Development Economics’ wisdom says that as the economy progresses the sectoral shares of output change too. Historically, most of the developed countries became service sector dominant economies only after going through an elaborate phase of industrial development, where the secondary sector typically contributed around 50 percent to Gross Domestic Product (GDP). However, Indian economic growth has come about mostly by bypassing growth of the secondary (industrial) sector.

Despite the decline in the agricultural sector’s share in GDP, the secondary (Industrial) sector’s share in GDP did not take off as expected. Since the 1970s, the share of the secondary sector as a percentage of GDP has hovered around 25 percent. Recently, in 2013 too the share of industry in the GDP was 25 percent. The average share of the secondary sector in GDP for lower income countries to which India belongs is around 40 percent or more.

 The industrial sector showed a meagre annual growth rate of 0.35 percent. In fact the manufacturing sector registered a decline in output by 0.71 percent.

  If we compare the sectoral output shares in GDP of China in 2013 with India, we see a stark difference in the shares of industry and service sector. As against India’s 25 percent industrial sector contribution to GDP, its GDP, China’s secondary sector contributed close to 45 percent to total output in 2013. The same is the case with countries like Indonesia, Bhutan, Thailand and Philippines.

In India, the secondary sector’s growth since the 1970s was dampened by various policies that hindered the growth of the manufacturing sector in India. The emergence of the ‘License Raj’ was one of these.  In addition to these licensing processes, the imports of raw materials and capital goods were restricted. There were multiple excise duties on goods. Third, the public sector had monopolies in services like banking, airlines, and electric power. The sectors that were open for private investment were limited. Fourth, the Monopoly Restrictive Trade Practices act limited the size of existing firms. Even after the 1991 reforms, a lot of industries were reserved for the small-scale industries (SSI) by the SSI Reservation Act which limited the scope of large-scale manufacturing Fifth, stringent labor laws also posed an impediment in the path of efficiency and growth of industrial sector. These factors may have led to the bypassing of industrial development stage in India development experience since the 1970s.

A few points need to be mentioned while analyzing the Indian case. India has abundant unskilled labor. However, the Indian industry is mostly remained capital or skilled-labor intensive. The encouragement of engineering and chemical industries called for extensive use of skilled labor. Some of the fastest growing sectors in India namely, Telecommunications, Automobile, Pharmaceuticals and Software industry have remained mostly skilled labor intensive. Therefore, the lack of development of unskilled-labor intensive sector in India may be one of the many causes that is holding back industrial development in India. The fact that in spite of various liberalization measures, the of growth in the industrial sector has not been impressive indicates that some domestic policy restraints such as  strict labor laws that discourage the entry of large scale unskilled labor intensive firms in the industrial sector, may be responsible for such stagnancy. 

In a country like India that has a large population of unskilled labor, industrial development and availability of livelihood to the people through secondary sector jobs can play a vital role in reducing poverty. As pointed out by the United Nations Industrial Development Organization (UNIDO), “a competitive and environmentally sustainable industry plays a crucial role in accelerating economic growth, thereby reducing poverty” (UNIDO 2010). Thus if India is to achieve a pro-poor and balanced growth, the development of industry cannot be ignored.