The Rise & Rise of Services

AGRICULTURE and industry are growing only slowly, but services are growing rapidly. That has been the secret of India’s success in the last decade. But is this sustainable? Many Indian economists think not.

Shashank Bhide of the NCAER told this newspaper, “The services sector cannot grow independently of the growth in agriculture and manufacturing. Lack of growth in the latter two would eventually choke off the services sector, bringing down the overall GDP growth in the coming year.”

Many other economists feel that the rapid growth of services owes a lot to the explosion in pay and pensions after the Pay Commission Award, and hence is illusory and unsustainable.

I think most people underrate services as a growth dynamo in its own right. The Soviet Union ignored services to the point of calculating only gross material product, not GDP: it left out services altogether as mere adjuncts to production rather than value in their own right. Too many Indians have a similar bias.

In fact, services can rise stridently even independent of manufacturing or agriculture.

The proof of the pudding lies in global trends over the last 20 years. The accompanying table should astonish those who believe that services account for an unsustainably large proportion of our GDP.

In fact, India is a laggard in services compared with other developing countries, and even South Asia.

The share of services in world GDP has risen from 55 per cent to 63 per cent between 1980 and 1999. India’s share is up from 36 per cent to 46 per cent. Yet others in South Asia have higher ratios, as in Sri Lanka (52 per cent), Bangladesh (50 per cent), and Pakistan (49 per cent).

While rich countries are known to have a high share of services, readers may be surprised to know that developing countries can also have high ratios: Latin America’s is up from 50 per cent to 62 per cent.

Africa is a big surprise, up from 43 per cent to 56 per cent in 1980-99. Africa’s ratio has always been higher than India’s, despite its lack of a Pay Commission or software boom.

What accounts for the services boom? First, forget the notion that people need only roti, kapda and makaan. Even the poor see entertainment, information and healthcare as basic needs.

The non-poor enjoy eating out and tourism. Entertainment is among the fastest growing industries in the world, fuelled by the rapid spread of TV and cassette-radios.

Bollywood always made money, but TV has made even cricket and quiz shows money-spinners. The Soviets thought that services (like transport and trade) added just a small amount to the value of goods (like TVs).

But we now know that the opposite is true, that TVs add just a small value to the entertainment, information and advertising they generate.

Second, services like health and education are booming in many countries, and are largely independent of the production of goods.

According to a recent study by Nutam Gothivarekar in this newspaper, health spending has become the fastest-growing sector of the economy, growing at a compound rate of 26 per cent annually in 1993-2000.

Spending on hotels and restaurants has grown at a compound rate of 18 per cent. Spending on food and clothing is rising more slowly, at 14 and 9 per cent respectively in nominal terms. Information technology has boomed, and software exports now account for 2 per cent of GDP.

The Pay Commission award has unquestionably inflated the data for service growth. But that occurs once every decade, and gets evened out over time. It is not the main or even a key reason for the dynamism of services, which rose stridently even before the Pay Commission award.

As transport and communications improve, so does internal trade. Once upon a time. India consisted largely of self-sufficient villages. But increasingly farmers are shifting to activities requiring purchased inputs and outputs.

They buy seeds, fertilisers, pesticides, herbicides and farm implements and tractors. They sell their output to distant corners of the country.

The fastest growing areas of agriculture are milk and animal husbandry, fisheries and vegetables and fruits. The share of foodgrains in agriculture is down to half. This move from self-sufficiency to transport across regions means a considerable rise in service income from transport and trade even if there is no increase in farm production.

The same holds true of many manufactures. This is one more reason why services are growing much faster than goods production.

Now, I am all for faster industrial production. As the table shows, China has an exceptionally low share of services in GDP. This is partly on account of poor statistics but also because of rapid industrial growth.

Some other miracle economies of Asia also had low service ratios at phases comparable with India’s today, thanks to their success in export-led manufacturing.

If we manage to copy that, we can raise GDP growth to 10 per cent annually. That looks a pipe dream right now. But the saving grace is that, thanks to services, we can record 6 per cent growth even with very limited industrial and agricultural growth. Few other countries can boast such a possibility.

What do you think?