Service led Growth in India: Is it sustainable?
INTRODUCTION
Most of the developing economies, in the last couple of decades, have
undergone a significant structural shift. The share of agriculture in total value
added has significantly declined, correspondingly the share of manufacturing
and services sector has increased with the share of manufacturing sector
growing at a faster pace than that of services sector. However, India is a unique
case in this respect. Most of decline in the agricultural sector in India has been
picked up by the services sector and it now accounts for more than 50 per cent
of the gross domestic product.
Service sector has emerged as the largest and fastest-growing sector in the
global economy in the last two decades, providing more than 60 per cent of
global output and, in many countries, an even larger share of employment. The
growth in services has also been accompanied by the rising share of services in
world transactions. Testimony to the rise in international supply of services is
the fact that trade in services has grown as fast as trade in goods in the period
1990- 2003 (i.e., 6% per annum). Along with this, worldwide there has been a
marked shift of FDI away from manufacturing sector towards services sector.
The share of services in total FDI stock has now increased to around 60% since
2002 as compared to less than half in 1990 and only one quarter in 1970s.
Growth of service sector with Respect to India
In line with the global trend, service sector in India has also grown rapidly in
the last decade. Its growth has in fact been higher than the growth in agriculture
and manufacturing sector. The Service sector now accounts for 53.89% of total
India’s GVA of 179.15 lakh crore Indian rupees. With GVA of Rs. 46.44 lakh
crore, the Industry sector contributes 25.92%. While Agriculture and allied
sector share 20.19%.contributes. In the trade mode, services trade has also
grown at the same rate as goods trade over the 1990s (i.e., about 6.5 per cent)
and its share in total trade has reached around 24 per cent. Growth of trade in
services has also been accompanied by growth in the share of services in total
inward FDI. FDI (approvals) into service sector constituted around 30 percent
of total FDI approvals in 2003. Interestingly, outward FDI from India has also
grown rapidly and in 2003 outward FDI stock in services constituted around 25
% of total outbound FDI stock.
However, though the growth of service sector in India is in line with the global
trends, there are two unique characteristics of India’s service sector growth.
1. The entire decline in the share of agriculture sector in GDP, i.e., from 32
% in 1990 to 22 % in 2003, has been picked up by the service sector
while manufacturing sector’s share has remained more or less the same.
In general, such a trend is mainly experienced by high-income countries
and not by developing countries.
2. In spite of the rising share of services in GDP and trade, there has not
been a corresponding rise in the share of services in total employment.
This jobless growth of India’s service sector, with no corresponding
growth in the share of manufacturing sector, has raised doubts about its
sustainability in the long run.
Further, it is found that growth pattern in the service sector has not been
uniform across all services in India. Some services have grown fast in terms of
their share in GDP and also in terms of their share in trade and FDI (e.g.,
software and telecommunications services). But there are some services, which
have grown fast but have not been able to improve their share in international
transactions (e.g., health and education) while there are some services that have
in fact witnessed a negative growth and also a low share in international
transactions (e.g., legal services).
OBJECTIVES
The overall objective of this project is to find out whether the service led growth
in India is sustainable or not. An assessment of performance of services at the
aggregated as well as the disaggregated level is undertaken in terms of their
shares in GDP, employment, trade and FDI and accordingly different services
have been categorized in order to identify crucial constraints on their growth in
the long run.
Critical issues that have been identified are:
I. What is the pattern of growth in India’s service-sector, i.e., how do
different services compare in terms of their growth rates and shares in
GDP, employment, trade and FDI?
II. What explains the lack of employment growth in the services sector?
III. Can India’s service sector sustain its growth ?
GROWTH IN INDIA’S SERVICE-SECTOR
The emergence of India as one of the fastest growing economies in the world in
the 1990s can be attributed, to a large extent, on the rapid growth of its service
sector. The growth of output in the service sector in the 1990s has been much
higher than the growth of output in agriculture or industry. Consequently,
contribution of services to GDP in the period 2001-2004, has been more than 60
per cent per annum.
We find that the service sector in India witnessed a phenomenal growth in the
decade of 1990s. During 1980s, its output grew at the rate of 6.6 per cent per
annum, while during 1990s the growth rate increased to 7.5 per cent per annum.
From 1994-2004, the service sector has grown on an average by 7.9 per cent per
annum, ahead of agriculture with growth of 3 per cent per annum and
manufacturing sector with growth of 5.2 per cent per annum
A closer scrutiny of India’s service sector reveals that amongst services,
business services has been one of the fastest growing services in the 1980s
closely followed by banking and insurance. The prime drivers of growth in
services, apart from business services in the 1990s, are found to be
communication services (with average growth of around 13.6 %) and hotels and
restaurants (with average growth of around 9 %).
Source: https://icrier.org/pdf/Working%20Paper%20249.pdf
Share in GDP
A striking feature of India’s growth performance is that in the four decade
period, 1950 to 1990, agriculture’s share in GDP has declined by about 25
percentage points, while industry and services have gained equally. The share of
industry has stabilised since 1990 and consequently the entire subsequent
decline in agriculture has been picked up by the services sector . During the
1990s, the contribution of service sector to the growth rate of GDP was nearly
60 per cent in contrast to 54 per cent in middle income countries, 43 per cent in
least developed countries and 34 per cent in China. High share of services in
GDP is a unique feature of the Indian economy as in other developing countries
decline in agricultural sector’s share has been followed by growth in
