Service led Growth in India: Is it sustainable?

Introduction

The service sector of the economy, also known as the tertiary sector, is the third
of the three economic sectors of the three-sector theory, (also known as the
economic cycle). The others are the secondary sector (manufacturing), and the
primary sector (agriculture). The service sector consists of the production of
services instead of end products. Services (also known as "intangible goods")
include attention, advice, access, experience, and affective labour. The tertiary
sector involves the provision of services to other businesses as well as final
consumers. Services may involve the transport, distribution, and sale of goods
from producer to a consumer. The goods may be transformed in the process of
providing the service, as happens in the restaurant industry. However, the focus
is on people by interacting with people and serving the customer rather than
transforming the physical goods The growth of the Services Sector in India is a
unique example of leap-frogging traditional models of economic growth. Within
a span of 50 years since independence, the contribution of the service sector to
the country’s GDP is a lion’s share of over 60%. However, it still employs only
25% of the labour force. Consequently, agriculture (which is stagnant) and
manufacturing (which has not yet risen to its full potential) continue to sustain
most of the employed population. This presents a unique challenge to future
economic growth in India and requires out of the box solutions that will help
rapidly harness the potential of the service industry in India. Invest India takes a
look at the contribution of the services sector in the Indian economy, its
successes and also explores potential enablers for future equitable economic
growth. Among fast growing developing countries, India is distinctive for the
role of the service sector. Where earlier developers grew based on exports of
labour intensive manufactures, India has concentrated on services. The Indian
services sector was the largest recipient of FDI inflows worth US$ 88.95 billion
between April 2000 and June 2021. The services category ranked 1st in FDI
inflow as per data released by the Department for Promotion of Industry and
Internal Trade (DPIIT). Although there are other emerging markets where the
share of services in GDP exceeds the share of manufacturing, India stands out
for the size and dynamism of its service sector. Sceptics have raised doubts
about both the quality and sustainability of the increase in service sector
activity. They have observed that employment in services is concentrated in the
informal sector, personal services and public administration, activities with
relatively little scope for productivity improvement and limited spill overs.
Research Problem

When an economy grows, both demand side and supply side factors operate that
lead to higher growth in the service sector as compared to the other sectors and
lead to a larger share of service sector in total employment. These factors are:
A. Demand-Side Factors:
a) High-income elasticity of demand for final product services,
b) Slower productivity growth in services that leads to higher employment
potential
c) Structural changes within the manufacturing sector, which make contracting
out services more efficient than producing them in the firm or household.
B. Supply-Side Factors:
Trade Liberalisation and Reforms
a) Increased trade
b) Higher foreign direct investments in services
c) Improved technology

It has also been observed that in the creation of new ways of satisfying wants,
technological changes are as important in-service sectors (such as health care)
as in commodity sectors, but when it comes to cost reduction for existing
products or services, technological change is more frequent and more powerful
in its effects in the commodity sector. Therefore, productivity of service sector
relative to productivity of commodity sector may vary inversely with income
level of the country.
In other words, between poor and rich countries the productivity differential in
services is found to be lower than that in commodities. However, more recently,
two alternative arguments for lower productivity in services have been put
forward. These are greater investment has been done in new technology
(especially IT) in services sector and this may take time to lead to productivity
enhancement and low productivity of services is a product of mismeasurement
of output in services since an increasing portion of output is not captured in the
basic statistics. A key problem in measuring productivity relates to obtaining a
suitable measure of output of services over time.
In India we find that though there has been a phenomenal growth in the service
sector, this growth has not been followed by a corresponding high growth in
employment in the 1990s. And this rise in the share of services in employment
has been much slower than the decline in the share of agriculture and
manufacturing in total employment. This shows that while output generation
has shifted to services, employment generation in services has lagged far
behind.

Article Review

1. Sustainability of Services-Led Growth: An Input Output Analysis of the

Indian Economy Sanjay K. Hansda
India has come to be increasingly recognised as a post-industrial society and
knowledge-based economy. The ascendancy of services has had a stabilising
effect on the growth process itself. The sector's contribution to the overall GDP
peaked an all time high of 65.1 per cent in the 1990s. The preponderance of
services in the Indian economy runs counter to the conventional wisdom on
development at least on two counts. The well-known sequence of structural
transformation from an agrarian economy to a predominantly service economy
en route an industrial economy has not been witnessed in India.
In 1999-00, services accounted for around 23.5 per cent of total employment in
India. On the other hand, agriculture still continues to account for a major share
of employment. The observed counter-facts in terms of sequence of growth and
employment have been an added concern. The high growth momentum of the
1990s seems to have petered out in the new millennium. The GDP growth
crashed to an abysmal 4.0 per cent in 2000-01, the lowest since 1992-93. A
modicum of recovery set in during 2001-02 both for the services sector and the
GDP. A perceptive view on the services growth assumes prescriptive
importance in steering the economy on to the path of recovery. The study is
built around the following quests:. what is the services intensity of the various
sectors of the economy? How strong are the backward and forward linkages of
services with the rest of the sectors?
SECTION 1
The role of services in the development process is marked by a long
controversy. Adam Smith was of the view that services 'perish in the very
instant of their performance and seldom leave any trace or value behind them'.
The debate seems to have shifted its focus to the level of productivity. The
reported low productivity in services has been questioned, among others, by
Griliches (1992). The low level of services productivity is advocated to be a
fall-out of mis- measurement of services output. Factors like deregulation and
increased competition are set to raise productivity at least in select services.
The decline in manufacturing and the corresponding shift to services is widely
held to be unsupportable in the long run since services depend critically on
manufacturing for their existence. The increasing resembling of services with
commodities has enabled the former to emerge as the major driving force in
economic growth. The Gershuny effect is found to operate in a number of
developed and developing economies including Brazil. With the increasing
monetisation of the economy, a major chunk of household activities are
outsourced from the market. The measured growth of national income is,
therefore, biased upward.
The ascendancy of services in the developed world has often been accompanied
by deindustrialisation. Kaldor (1966) was of the view that a mature economy
could continue to benefit from economies of scale. Such a process has possibly
worked out in rapid industrialisation of developing world and de-
industrialisation of developed world. In the Indian context, the increasing share
of services in GDP has been a source of controversy. Rao (1954) discounted it
as an indicator of development in the context of a developing country. The
sustainability of a service-led growth was questioned by Shah (1987) and Mitra
(1988).
SECTION 2
The preponderance of services over industry is not a recent phenomenon for the
Indian economy but has been in place since 1950s. A number of developing
countries such as Zambia, Chad, Sudan, Kenya and Pakistan have also
undergone a similar phase in their development process.
India's services sector has emerged as one of the fastest growing segments of
the economy with a compound annual growth of over 50 per cent during 1990s.
A rapid increase in expenditure on public administration and defence, social
services also has an impact on the growth of services sector.
Section 3
CSO's latest Input-Output Transactions Table (IOTT), which pertains to the
year 1993-94, has been utilised. The widely used measures of inter-sectoral
dependence are the backward, forward and total linkage indices a la Rasmussen
(1956).
The Rasmussen measures of inter-sectoral linkages have been criticised in the
literature on a number of grounds. Heimler (1991) has put forward an
alternative index of vertical integration. This measures the multiplying effect of
each activity on the gross output of the rest of the economy.
Section 4
The sectoral intensity of activities provides a ready- reckoner of the inter-
sectoral linkages between agriculture, industry and services. 34 out of 115
activities or 30 per cent activities have had the agricultural intensity above the
average of 7 per cent of gross output. In terms of the direct measure of intensity
(G), 60 out of 115 activities or 52 per cent activities have reported higher than
the average industrial intensity of 29 per cent of gross output. The industrial
sector with 57 out of 80 industrial activities or 71 per cent has been the most
industry intensive.
With 63 out of 115 activities having the above average services intensity, the
predominance of services intensive activities is clear in the Indian economy.
Unlike agriculture and industry, services sector per se is not the most services
intensive sector. Three industrial activities, viz., office computing machines,
ships and boats, and coal tar products stand out as relatively services intensive.
At the aggregate level of 10 categories, agriculture and manufacturing have
turned out to be relatively agriculture-intensive. None of the aggregate
categories of services are agriculture- intensive. On the other hand, industry has
turned out more services-intensive than services at aggregate level.
Rasmussen index of backward and forward linkages looks at direct and indirect
linkages. Services activities have the largest inducing effect on the rest in terms
of backward linkage. Activity-wise, construction from industry, trade and other
transport services from services, and animal services (agricultural) have had
large backward index value. The index value of forward linkage has varied
between -2.43 for crude petroleum & natural gas and 37.95 for trade. A larger
proportion of activities in services (69%) than in industry (8%) or agriculture
(27%) are key sectors of the economy.
India's five top performers in terms of the backward linkage index have as well
a high backward coefficient of variation index. However, seven out of 13
services activities (i.e., 54 per cent) as against 27 out of 80 industrial activities
and eight out of 22 agricultural activities have index value below average.
Mining, quarrying, manufacturing, transport, storage & communication,
agriculture, trade, hotels & restaurants, and personal, social & other services
have low backward coefficient of variation. High proportion of services
activities with high forward linkage is also accompanied by high proportion
with low coefficients of variation (Table 8).
14 out of the 115 activities having the index value higher than the average are
reported in Table 9. Services sector stands out to be more growth inducing than
industry or agriculture. However, the multiplier value remains less than one for
all the 115 activity-wise. Activity from the services sector appears to have a
positive impact on the rest of the economy. Only one activity – plastic products
from industry – indicates a possible negative impact. The top five performers in
terms of the total of backward and forward linkages, viz., trade, other transport
services and other services from the service sector, construction from industry,
and other crops from agriculture are also found to have relatively high stimulus
for the economy.
Section 5
The study has primarily focused upon the inter-sectoral linkages as emanating
from the input-output transactions tables for 1993-94. While services and
agriculture do not seem to share much inter- dependence, industry is observed
to be the most services-intensive. 62 per cent (54 per cent) of services activities
are inducing impulses in India's economy. This is compared to just 4 per cent of
industrial activities and 32 per cent agricultural activities. The strong backward
linkage of services is found to be attributable to large inter-sectoral purchases
from only a few sectors.
The expansionary potential of services on non-services and services, in turn, has
been examined by computing the index of vertical integration. Seven out of 13
services, 80 industrial and 22 agricultural activities are found to have the largest
growth potential. Trade, banking and other transport services, all belong to the
services sector.
Reference:
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/38040.pdf

2. Is the Service-Led Growth of India Sustainable?

Bharti Sing her study “Is the Service-Led Growth of India Sustainable?” has
aimed to provide insights regarding the Situation of the service sector in India in
terms of sustainability. According to the journal, the service sector of India has
shown a consistent rise in the GDP share and growth rate since the take-off in
the journey of economic development. The shares of the services in GDP have
risen considerably from 1950s to2000s, in addition to this the contribution of
the service sector to GDP share has increased rapidly since the post-
liberalization I.e., the 1990s. The study has also provided the contribution
of Services sub-sectors to the GDP with the help of past data and also has taken
into account the growth in modern services like trade transport communication
banking hotels and restaurants. The author is trying to convey that although it is
recognized that economic development should not only lead to a higher national
GDP and better quality of life, but it should also be environmentally sustainable
as well. The author concludes that there is a need to employ the growing human
capital and improve the human productivity in order to achieve sustainability in
the service dead sectors in addition to this she has also mentioned that
expansion of Services in micro small and medium enterprises can
help in harnessing the potential of abundant skilled labor force of the country
and reduce the overall dependence on one particular sector as the service
subsectors use skilled labor more intensively and emphasis should also be laid
on the technologically driven ventures in modern services. Hence it can be
concluded from the study that for economic and social sustainability there is a
need to increase investment in education entrepreneurship technology modern
means of communication and transportation and human development coupled
by desirable policy reforms in doing so India would be able to successfully
achieve economically socially and environmentally sustainable service-led
growth.
Reference:
http://www.ijtef.org/papers/219-D10037.pdf

3. Service Revolution in India by Ejaz Ghani.

Services happened to be the largest sector in the world with greater than 70% of
the global output and globalisation of services made it highly possible for the
sustainability for the service led growth. The services being cannot be
transported, traded and costly are of the past and the revolution of the services
made all of that go away. Developing countries can sustain service-led growth
as there is a huge room for catch up and convergence.
One of the best examples of the service led growth would be the Hyderabad in
India. During the period of 1998 – 2008 there was a massive increase in the
service exports of 45% and 8- fold increase in the Information Technology
companies, which led to employment increase in 20- fold. In these two decades
Andhra Pradesh made itself into a major service centre from a large agricultural
economy and India gained the reputation of exporting modern services.
In the world’s economy India and China are recognised for their rapid economic
growth despite their different approaches in the growth of the economy. While
India has concentrated growth in the service sector from the agricultural
services China made itself known for manufacturing sector and experienced a
manufacturing led growth. This also raised big questions in developing
economics. Can developing countries jump straight from agriculture into
services? Can services be as dynamic as manufacturing? Can late-comers to
development take advantage of the globalisation of service? Can services be a
driver of sustained growth, job creation, and poverty reduction?
India’s development experience offers hope to late-comers to development in
Africa. The share of service sector in India is much bigger than in China, for its
stage of development. India and other South Asian countries resemble the
growth patterns of Ireland and Norway, rather than those of China and
Malaysia. Despite being a low income region, India and other South Asian
countries have adopted the growth patterns of middle and high income
countries.
Reference:
 https://voxeu.org/article/services-led-growth-india-new-hope-
development-late-comers.

4. Arguments for and against Sustainability of Service Sector in India

One of the critical issues that have been discussed in the literature is the role
played by services in the growth process. The article provides the arguments in
favour as well as arguments against the Sustainability of service sector in India.
Arguments in favour includes the ability of the service sector to make up for
industrial failures wherein a global economic system, production tends to flow
to countries where the service infrastructure is well developed and efficient
rather than the services that follow production. Another claim that services have
no innovation and are only consumers of innovation in the manufacturing
industry is incorrect. On the contrary, service innovation takes the form of
"when, where, and how services can be delivered more efficiently." Investing in
ICT (Information and Communication Technology) to improve productivity and
tradability of services is one of the factors that contribute to the innovation of
services. Apart from that the emergence of a broad based prosperous middle
class (in India) and an ageing population in developed economies has the
potential to generate additional employment in the services. An example for the
latter is the demand for health services due to the relative low cost of healthcare
services in India.
Another argument raised in the article involves externalization of non-core
activities, one of the factors driving the growth of the service sector, is regarded
as the driving force of the growth of the service sector. Such externalization
impacts the growth of small business services, resulting in low-skilled jobs.
Also a company's competitive advantage depends heavily on the provision of
professional services such as after-sales service.
And finally Increasing incomes due to service led growth would lead to change
in lifestyle inclined towards higher leisure spending. This would generate
multiplier effect of employment in services by the promotion of tourism,
hospitality, and transport sectors.
However arguments against sustainability of service sector dates back to Adam
Smith who held that ‘services perish at the very instant of performance’.
However, the concept and scope of the service sector of Adam Smith’s time are
quite different from those of today.
Also due to the low productively characteristic of service sector, higher
productivity in industry was visualised to raise wages in services
disproportionate to its own productivity level. This could lead to increased costs
and prices of services relative to goods. Another aspect mentioned in the article
included Growth of income faster than employment could have serious
implications for inflation and income distribution.
Reference:
https://www.yourarticlelibrary.com/services/arguments-for-and-against-
sustainability-of-service-sector-in-india/40267

Sources for Excel file:

  https://data.worldbank.org/indicator/NY.GDP.PCAP.KD
 http://www.mospi.nic.in/central-statistics-office-cso-1

Group 5
Simran Shokeen 257/2021
Samriddh Singh 206/2021
Swati Fogat 232/2021
Kushagra Sharma 201/2021
Abhiram Mallela 213/2021
Harshit Bansal 242/2021