From Industry to Services

India’s greatest comparative advantage lies not in manufacturing but in services, says Swaminathan S Aiyar

India’s future lies in services, much more than industry. Most people in India almost automatically equate business with manufacturing. This is plain wrong. The share of services in GDP has been rising fast, and (if we go by the example of the OECD) will eventually become double that of industry. A new mind-set on the part of both businessmen and policy makers is needed.

According to global standards, India is a laggard in services. These were emasculated for decades by a mistaken socialist belief that manufacturing alone mattered, and that services were no more than an adjunct of manufacturing

This was an illusion of Soviet planning, and the illusion extended to India. Neither Joseph Stalin nor Jawaharlal Nehru ever dreamed that service economies like Hong Kong or Singapore could become super-rich. These once-developing countries today have per capita incomes above $24,000, richer by far than their former colonial master.

Initially they specialised in garment sweatshops and labour-intensive manufactures, and this took them to middle-income status. But becoming rich involved a switch to services. The share of services in GDP is a whopping 83 per cent in Hong Kong and 64 per cent in Singapore.

India too is becoming a service economy though slowly. In 1995, the share of services in GDP was 41 per cent, well above the 29 per cent share of industry. What is more, the share of services has risen steadily from 36 per cent in 1980 to 41 per cent in 1995. Industry grew fast in this period, so services grew even faster

Yet the share of services in India’s GDP remains lower than in its neighbours in South Asia. As against India’s ratio of 41 per cent, that of Pakistan is 50 per cent, Bangladesh 52 per cent and Sri Lanka 52 per cent. India’s ratio looks emasculated even in comparison with Sub-Saharan Africa (48 per cent) or Latin America (55 per cent).

In high-income countries, the services-to-GDP ratio was 58 per cent way back in 1980, and rose to 66 per cent by 1995. The share of industry, by contrast, declined from 37 per cent to 33 per cent. So, by 1995, the share of services was double that of industry, an indication of where India’s future lies in the next century.

A further indication lies in the internationalisation of services. Once, services were regarded as non-tradeable, and restricted to the home market. But now world exports of services have been rising raster than exports of goods (10 per cent annually in 1985-95 for services against 8

percent annually for goods, according to Dr Kalyan Raipuria in a recent issue of EPW). Global service exports now account for an astonishing $1,200 billion, against $4,800 billion for goods.

No wonder the liberalisation of trade in services has become an important part of agenda of the World Trade Organisation. India needs to press for changes tailored to its needs, not just in computer software but many potential areas.

If you think about it, you will realise that India’s greatest comparative advantage lies not in manufacturing but in services. There is much talk of harnessing our cheap, skilled manpower in manufacturing, but the scope for this is quite limited. The labour content of all manufacturing is dropping steadily with new automated technology. In Maruri Udyog, for instance, the labour content of a car is below 2.5 per cent. In the new steel plants like those of Essar Steel and Ispat India, wages and salaries amount to only 1.3 per cent of sales. Even in other organised industries, the labour content in a modern factory is typically below 10 per cent.

By contrast, the labour content of services can approach 100 per cent. This is where India’s cheap skills give it the biggest comparative advantage, yet this is not widely appreciated. Traditionally, we have ignored this fact because of major structural difficulties in translating cheap skills into service exports. But modem technology and globalisation are changing all that. The computer. Internet and modem telecommunications mean that the service tasks that earlier had to be done in-house can now be sub-contracted across the globe.

We have already seen the shift of jobs in manufacturing from high-income to low-income countries. In the 21st century, we should increasingly see the shift of services from high-income to low-income countries.

The shift requires massive investment in communications and an overhauling of regulations to cut hassles and make truly global operations simple. Provided we do this, we can attract billions in the form of foreign investment, earn billions more through exports, and give employment to millions.

In one sense, we are already major exporters of services without quite being aware of it. Remittances from Indians abroad totaled no less than $11.7 billion in 1996-97, against official exports of $ 29 billion. The remittances represent mainly the export of labour through temporary migration.

We need to work assiduously within WTO promote temporary migration in form of fixed-term labour-intensive contracts. Fewer and fewer people in OECD countries are will in to do dirty manual jobs. Some dirty jobs(like street cleaning) can be mechanized up to a point, but beyond that will require manual labour.Illegal immigration has so far met such needs in many countries. We need to lobby in WTO and other bodies for formal labour contracts.

However, we need to go well beyond this to other service areas. To get an idea of the potential, take a look at the changing consumer profile in the rich countries of the North. Population growth has slowed to trickle in OECD countries (save in countries where immigration is still substantial. In Germany, the population has been falling for years. Even as the birth rate plummets, the aged are living longer than ever, and life expectancy in the OECD may gradually rise to 85. In Germany, pensioners threaten to outnumber the labour force by the 2025.

These demographic changes are an important (though not sole) reason for the relentless shift from goods to services. Through most of history, living standards rose hardly at all, and population growth was the biggest factor driving consumer demand. All consumers need basic goods, so there was constantly expanding demand for such goods. However, when population growth slows to trickle(as in the OECD), the demand for basic goods slows too, since there is a limit to the amount of coffee, tea, cloth, TVs or cars any person will purchase. The post-war baby-boom generation has given way to the baby-bust generation, and this is changing the while pattern of demand.

As people grow richer, they demand more and more services. Families do less work in-house and contract out more (dining at restaurants instead of home greatly increases the demand for services). Travel, tourism and entertainment take on an increasing share of consumption. So do medical and educational services.

This has major implications for India. The global shift from manufacturing to services implies that the scope for increasing exports of goods will steadily get squeezed over time. After years of neglecting exports, we must of course catch up. But we must also realize that we need increasingly to export services rather than goods. Which services are most promising? I will elaborate on that in my next column.

Services
GDP (%)
THE RISE OF SERVICES
Composition of
GDP 1995 (%)
1980 1995 Agriculture Industry Services
India 36 41 29 29 41
Pakistan 46 50 26 24 58
Bangladesh 34 52 31 18 52
Sri Lanka 43 52 23 25 52
Low Income economies 32 35 25 38 35
Lower middle income na 49 13 36 49
Upper middle income 43 53 9 37 53
Upper income economies 58 66 2 32 66
Sub-Saharan Africa 38 48 20 30 48
Latin America/Caribbean 51 55 10 33 55
South Asia 35 41 30 27 41

What do you think?