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The Great Indian GDP Growth Story – India’s Dependence On The Service Sector Ain’t All That Bad For The Health Of The Economy.

India being the world’s 3rd largest economy on PPP terms and 12th in terms of dollar value is poised to be a major role player in the world economy in near future.

World economic balance is driven by several factors and is contingent upon the intrinsic strengths of each of the major economies in the world. India, despite being one of the most populous countries is privileged to be one of the youngest populations in the world compared to other superpowers like, the US, China or Japan.

Before the onset of the two major recessions in the year 2008, the domino effect of which ravaged the world economy, everything seemed to be hunky dory for India.

From the domestic currency trading really strong against Dollar at sub 45 levels, GDP figures widely expected to register a double digit, India was being considered the rising star not only in Asia but also all over the world. GDP growth rate for the years 2005 to 2008 have always veered around 9.5% and it was widely anticipated to touch double digits.

In this article we shall try to introspect as to what are the factors that actually affect the great Indian GDP growth story. How the sectors namely primary, secondary and tertiary have not contributed equally to the GDP growth of the country. Which sectors need more fill up so as to ensure a more balanced and sustainable growth of the country.

Indian GDP Structural Composition Source: Planning Commission

This article is the first installment of the series on The Great Indian GDP Growth Story, wherein we analyze the structure of the economy to ascertain the relative weight of different sectors and related industries.

Besides we shall also draw insights from the occupational structure of the population to analyze labour-market and its relation with other sectors. The growth of output and the sectoral composition in the GDP Growth Rate would be analyzed primarily to bring out a clear picture of the sensitivity of GDP growth rate to its component sectors.

Sectoral Contribution to GDP:

The GDP contributions of various sectors of Indian economy have evolved from 1951 to 2013, as its economy has diversified and developed. In the follow graph we can see that Agriculture and Service sector GDP contribution rates have formed Mirror Image by the Service and Agriculture sector over a period of 30 years. Growth in the manufacturing sector has been moderate but steady.

Service Industry & Its Increased Presence in the Sectoral Composition to GDP Image : Planning Commission

India as an economy has evolved over a period of 65 years since independence. Since 1950, the economy has both in terms of economic activity and population has grown and importance of Agriculture as one of the largest contributors to Indian economy has come down whereas the services sector with less than 30% in 1982 turns out to be the highest contributor in 2014 with 59% to GDP. Please note that India includes Software, Information Technology, Information Technology Enabled Services, Communications and other economic activities of similar nature in its Services sector.

Post the Liberalization, Privatization & Globalization :

India saw the rays of economic liberation in a gradual manner after it opened up its markets from the mid-1980s. The Liberalization, Privatization and Globalization scheme of 1991 as recommended by Narsimha Rao Committee ushered in the era of true economic development.

Poised to be one of the fastest developing countries in the world, India witnessed several changes in the business environment from the erstwhile License Raj and Red Tapism.

Several sectors, especially the Capital segments in the financial markets experienced reforms including formation of SEBI to establish an organized capital market in the country; NSE to restructure the stock exchange space and facilitate the mobilization of fund via a vibrant secondary market were introduced.

The biggest game changer happened to be the sanction of Foreign Direct Investment in 35 sectors. Proposition of infusion of international capital in business ventures was made for the first time in India.

The grand LPG scheme reduced India’s dependence on agriculture sector to a very large extent although agriculture and its allied service sectors employs more than 50% of the Indian Population.

In-elasticity of GDP growth rate to Agricultural contribution:

GDP Growth Rate
Comparison of sectoral growth rate along with the GDP growth rate Image: Planning Commission

From the above graph can we say that agricultural contribution from more than 50% of the Indian population means nothing to the GDP growth rate? If we carefully appreciate the above graph then it’s visible that the sensitivity of the GDP growth rate to Agriculture Sector Growth rate is way lower compared to what it is for its peers namely, the manufacturing or the service sector.

What is the way forward to a Balanced Growth

What sense does it make for the policy makers, the regulators, and the government to support any sector in general? Either make it efficient or carry out initiatives to introduce mechanization of the agricultural activities and enhance the productivity of the sector or else why cannot India direct all its focus on the higher yielding sectors services or manufacturing to multiply the effect on GDP growth.

Yes, a school of thought says that service sector is an unviable option and can’t be banked upon for a sustainable GDP growth rate. As the purchasing power of the low cost Indians increase with higher employment in service, in the long run such workers would become expensive thus uncompetitive amongst their Asian counterparts. But can we say that is too farfetched and the effect can be realized only in the long run.

In the mean while, can India incorporate structural reforms in agriculture and manufacturing sectors which would correct the imbalances, thus leading to a more balanced growth?

Support to Service Sector

Service sector is a widely discussed and debated topic and that it does not help in a sustainable growth of the GDP is abound. So why can’t India have Think Tanks or Empowered Group of Thinkers to formulate and find out newer avenues or value drivers in the Service Sector so as to make it the biggest Service Providers Hub in the world. We often cite China as an exporters hub and talk about its dumping activities but again China can be seen as an example.

Demand for Manufacturing Exports Vs Demand for Service Exports

Even though export oriented manufacturing hubs are no less exposed to financial risks but does that hold true for service sector as well. For whatever reasons, superior mass production techniques, lower domestic demand thanks to the economic divide or disparity in East and West China they are highly dependent on exports revenue.

The fall in Chinese manufacturing data due to recessionary trends in Europe and other areas stands testimony to the fact.

Thus, we can also say that manufacturing growth rate would also not reap benefits in the long run as too much production would force the country to export its produce, which in turn would increase its dependence on the importing countries.

Is China Really The Next Super Power?

But with the present government under the guidance of the vibrant Mr Narendra Modi and his philosophies to support campaigns like “Make in India” , India can stand as an exception wherein the domestic manufacturing output can be supported by domestic consumption.

Need for Structural Reform in Service Sector

Hue and cry on the fact that higher service sector productivity will not fetch India a sustainable growth rate can be contested citing that manufacturing focused countries can also have a retarded GDP growth path.

Structural reforms in the Service Sector, Concentration on IT, ITES can be seen as the need of the hour. A major part of the service sector output should be encouraged even further. India still sees several IT engineers moving out of India to settle in the US thanks to higher pay.

We suggest that the Government should devise strategic schemes to lure in the experienced professionals of Indian Origin, settled abroad, to come back to India. Such Professional with years of International experience, can help India grow by introducing the best practices in every sector.

Up-liftment of Human Resource with Vocational Training

Why can’t the Indians be made vocationally more sound and confident? In India, perspectives have always been biased and more often than not flawed. Common perception of professional degrees like MBA, supposedly fetching higher salaries, should be discarded.

Today, more than 4500 B- schools churn out 3, 50,000 plus MBAs a year. Recent studies have shown that more than 70% of such MBAs are unemployable.

Such MBAs find solace in run-of-the-mill knowledge process outsourcing and other low end services such as back office transaction processing in the BPO sector.

India is the only country which allows a fresher to take up a course as generic as MBA and extends implicit support to Universities which offer such courses.

Instead, its time India deployed high end training solutions to engineers, technical courses which are more vocationally oriented and the products of such courses to move into high end services in the fields which cannot be easily emulated by competing economies.

Growth in only a specific facet of the service sector can be easily emulated and that can hurt the growth rate significantly.

It is imperative that with our huge pool of English speaking talented population, build exclusivity in certain areas of the service sectors where no other countries like Thailand, Indonesia, China, Japan can even think of venturing into.

Reform in the Indian Education System is Imperative – As the Demographic Time Bomb Is Ticking

The Indian Education system is at fault and hence reaping poor outcomes in Indian classrooms call for an immediate reform in the educations sector. India is spending billions on school infrastructure and making or rather forcing children to attend but mere forcing people is not going to serve the purpose.

The education system needs to be hauled up right from the rural level. There should be uniformity in the standard of syllabus and teaching quality across all the boards i.e. State, ICSE and CBSE.

If the governments both in the present and the past have made efforts to rev up the education system why has not it taken care of this demographic time bomb?

India is blessed with a young population so let us make the most of this gift to ensure a better future.

Research & Manufacturing Growth Rate

More research work should be done in the field of engineering. Student should be encouraged to do research and only then can the manufacturing sector see a sustainable growth. Better policies should be formulated to support the SMEs and MSMEs, domestic producers of engineering goods and other goods of capital nature.

Look at German GDP Growth Story and how the world swears by German Engineering. Its clear from the graph that Germany as a country has accorded more precedence to the Service Sectors.

German GDP Contribution
German GDP Sectoral Composition Source: World Bank

Sectoral balance should persist in the long run in India

Hence, the moot point is too much dependence on any sector is harmful and an efficient balance in the contributory levels of every sector should be introduced.

Minimization of Imports, maximization of exports will help an economy maintain stable currencies and register better trade figures; stronger policies both economic and regulatory can assuage the global investors and help build symbiotic trade relations.

All sectors should contribute in a balanced fashion and any skew should be corrected at the earliest.

This report is the first in series titled “The Great Indian GDP Story”, and has been prepared by Saswata Das, IIM C. The above report has been edited by Mr Prashant R Sahay and Mr Yash Vardhan. Your comments are highly solicited.

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