EC1205: Indian Economy

Sectoral Interlinkages, Growth and Trends

Session 4, 5 & 6

Tirtha Chatterjee
Outline of the module

• Structural transformation in India

• Three sectors of the Indian Economy

• Agriculture sector
• Industry
• Service sector

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Structural transformation in India

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Introduction- Structural Transformation

• Reflected in changing shares of the 3 sectors in national income & employment

• Primary sector: agriculture, livestock, forestry, and fishing

• Secondary sector: manufacturing, mining, construction, and utilities(electricity, gas, water),
• Tertiary sector is made up of a diverse range of services
• distinct from goods

• Reallocation of labour across sectors with different levels of labour productivity

• Analytical constructs are derived from stylized facts rather than economic
theorizing

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Lewis Model (1954)

• A low-income economy is seen to be composed of

• small modern sector, employs small proportion of labour force, high level of productivity,
• large traditional sector, employs large proportion of labour force, low level of productivity
• also holds a stock of surplus labour - underemployment
• Development is a process of labour transfer from traditional to modern sector
• No change in lab productivity in traditional sector as long as there is surplus
labour
• Economic growth from two sources
• purely from labour reallocation till surplus labour is zero.
• Post that, growth results from changing productivity

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Introduction- Structural Transformation- Kuznet’s framework

• Economic sectors in a low income economy are

• agriculture, with low labour productivity & large employment, and
• non-agriculture, with high labour productivity & small employment.
• Does not assume the existence of surplus labour in agriculture
• Assumes that labour productivity is growing in both sectors
• grows faster in non-agricultural sector
• Labour reallocation from agriculture to non-agriculture growth-enhancing
• Move to higher income jobs
• productivity growth in agriculture

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Which direction does causality run?

• Growth can cause structural change

• Expansion of markets creates new demands & new production activities follow.
• Income elasticity of demand for services > industrial goods > agricultural goods
• With increasing incomes & growing demand, economy would undergo transformation
• Structural change can cause growth
• Transfer of surplus labour at subsistence plus wage, increases profits
• Reinvestment of profits is a source of capital accumulation and economic growth
• Empirical evidence:
• Ocampo et al (2009) -cross-section of 57 developing & transition economies- 1970-2006
• GDP per capita growth rate & changes in shares of agriculture & industry in GDP.
• Pattern and sequence not uniform across economies

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Structural transformation: classical pattern observed

• In the earlier stages, at lower income levels, share of agricultural sector in both
output & employment is overwhelmingly large.
• At the next stage, as industrialization proceeds, the share of the manufacturing
sector in output and employment rises, while that of the agricultural sector falls.
• At an advanced state of development, after industrialization, the share of the
manufacturing sector in both output and employment diminishes, while that of the
services sector rises.

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Manufacturing sector- most growth enhancing- Kaldor (1966)

• Growth of labor productivity is much faster in manufacturing

• Higher scope of increasing returns to scale, division of labor, specialization, learning-by-
doing
• With increasing income, dd for manufacturing goods grows the fastest
• high income elasticity of demand
• As dd for other sectors increase, production requires investment & investments goods which
are manufactured goods.
• Rapid growth of manufacturing induces speedy labour reallocation
• Ability to employ relatively low skilled labour
• Man. growth induces productivity growth in other sectors through technology spill-overs.

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 Structural transformation in India- colonial rule

• Confined to change in composition of output Primary Secondary Service

sector sector sector
• Not much change in employment. Share in GDP
• Two World Wars provided an impetus to 1901 63.3% 11.2% 25.5%
industrialization, 1946-47 53.3% 15.2% 31.5%
• relative importance of manufacturing rose Share in employment
• Slow pace of of economic growth 1901 75% 10% 15%
Shares similar in 1911, 1921, 1931 and
1941
1951 76% 10% 14%
Source: Nayyar, D. (2019), India’s Path to Structural
Transformation. In The Oxford Handbook of Structural
Transformation

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 Structural transformation in India- post Independence

• Decrease in both in agriculture

• employment share less decline
• Increase in both in industries
• Higher increase in employment
• Increase in both for services
• increased more in output
• Less employment generation
• Both industries & services, o/t share
>> employment share.

• Figure Source: Nayyar, D. (2019), India’s Path to Structural

Transformation. In The Oxford Handbook of Structural
Transformation

• . Tirtha Chatterjee
 Structural transformation in India- post independence

• Between 1950 and 1970, shares of the three sectors evolved slowly.
• more visible in output than in employment.
• Conventional pattern of change
• Primary sector was replaced largely by the secondary sector, led by manufacturing
• Early 1990s share of industries in
• output peaked in the early 1990s and fluctuated thereafter around the same level until 2010 and
declined thereafter.
• employment continued to increase steadily from the early 1990s until the early 2010s
• Early 1990s, rising share of services gathered momentum

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 Structural transformation in India

• Overall picture suggests significant structural change in India

• Does not conform to the classical pattern
• Plausible that aggregates conceal as much as they reveal.
• Therefore, essential to disaggregate sectors into their constituent sub-sectors,
• Primary sector- agriculture is the dominant sub-sector
• Secondary sector- industry, manufacturing, and construction are the dominant sub-sectors
• Constituents of the services sector, however, are heterogeneous

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 Structural transformation- Agriculture (o/t - Fig 20.2 & emp - 20.3)

• Pattern was asymmetrical

• Labour absorption from other sectors
<< contraction in its share in national
income.

Figure Source: Nayyar, D. (2019), India’s Path to Structural

Transformation. In The Oxford Handbook of Structural Transformation

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 Structural transformation- Sec. sector (GDP top & emp bottom)

• Two shares about same in 1950

• Mid-1970s-mid-1990s: increase in o/t >>
share in emp
• Asymmetry diminished significantly
during the 2000s.
• Construction sector explains increase in
employment share: early 1990s to 2010s

Figure Source: Nayyar, D. (2019), India’s Path to Structural

Transformation. In The Oxford Handbook of Structural
Transformation

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 Structural transformation in Service sector- two groups

• Group A: L- intensive services, low barriers-to-entry & low technological-levels

• (i) wholesale and retail trade; (ii) hotels and restaurants; (iii) transport and storage; and (iv) other
social, community, and personal services,

• Group B: K & skill intensive, high barriers-to-entry & high technological levels
• (v) communication services; (vi) financial services; (vii) real estate and renting services; (viii)
business services; (ix) public administration and defense; (x) health services; and (xi) education
services.

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 Structural transformation- Services (GDP top & emp bottom)

• Employment: Group A >> B

• Shares of both in GDP > shares in
employment.
• Asymmetry in Group A < B
• Almost ½ of labour displaced from
agriculture absorbed in construction
while 1/3rd absorbed by Group A

Figure Source: Nayyar, D. (2019), India’s Path to Structural

Transformation. In The Oxford Handbook of Structural
Transformation

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Structural transformation in India

• Economic growth in India since 1980 follows Lewis (1954) with a slight twist.
• Labor absorption took place in sectors which are low skilled jobs in informal
sector
• Group A in services and construction
• Manufacturing was never a part of the story
• Limited possibilities of moving unskilled labour from
• low productivity occupations to higher productivity occupations
• informal sector to formal sector
• Rural–urban migration led to absorption of unskilled labor from low
productivity occupations in agriculture to higher productivity occupation in the
urban informal services sector

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Structural transformation in India

• Formal sector job generation has been low

• Employment in urban-India is concentrated in informal sector
• Informal contracts can be seen to be rising
• Indian urban-labour market has created small proportion of high-quality jobs
with secure contracts, pensions & health benefits
• Informality is even higher in rural nonfarm sector
• India is often therefore said to have a stunted structural transformation

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Comparing India with China

• The scale of reallocation was significant in both economies,

• much smaller in India than in China
• B/w 1994 & 2010, 20 % & 48 % of agri workers moved to non-agri jobs in India & China
• Slower pace of labour transfer meant slower agri-lab-productivity growth in
India.
• Improvement in employment conditions was much slower in India than China.
• Manufacturing sector was insignificant employer of workers moving out of
agriculture in India & major employer in China
• Services was far less important employer of transferred workers in India than
China.

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Comparing India with China

• Construction was major absorber of reallocated labor in India but not in China.
• Construction was even more important than services in India.
• Labor productivity in construction recorded zero growth in India
• Despite stagnation, labor reallocation from agriculture to construction was both
growth-enhancing and employment-improving
• Since productivity higher than agriculture
• It would have been worse in the absence of Government’s special employment
schemes, which generated low-skill jobs in construction

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Will the structural transformation lead to sustainable growth?

• It cannot be if there are sectors which are laggards

• Agriculture is lagging with less productivity and disguised unemployment
• Manufacturing is key here
• Or can service sector replace the significance of manufacturing sector?
• We will explore this in the section on service sector

• Indian economy facing an employment generation challenge

• Poor development of labour-intensive manufacturing sector has led to low urban employment
opportunities

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Agriculture sector

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Agriculture growth in India
• Share & growth rate of agri GDP declined over
the years
• Food grains gained the most over the years
• Initially yield driven (Green Revolution) but later
driven by area growth
• Before reforms area under oilseeds increased
because of import restrictions
• Post reforms decline in area under oilseeds
• Price related factors have favoured rice and
wheat in India
• Created several distortions

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Factors affecting Indian agriculture

• Non price factors

• Capital formation in agriculture
• Credit
• Research and extension
• Laws: Agricultural marketing, storage, trade

• Price factors-
• terms of trade
• exposure to international prices,
• Import liberalization has discouraged area under some crops
• MSP has favoured area under certain crops

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Capital formation in agriculture
• Share increased initially but declined post
reforms
• Two aspects- public and private investment
• Initially both were almost at the same levels.
Over time private> public investment
• Share of public capital formation gone down
from 52% in 1981–82 to 21% in 2012–13.
• In total capital formation
• Roads & irrigation part of public investment
• Outlay on irrigation shows a decline over the
years

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 Role of credit
• Bank nationalization had increased emphasis on
priority sector lending & led to increase in # rural
branches
• Post 1990s, emphasis on priority sector lending
declined
• # rural branches, credit–deposit ratio & shares of
priority sector and agriculture in total outstanding credit
of commercial banks declined
• Some revival in the 2000s
• due to an increase in indirect finance in agriculture and
• definitional changes that incorporated export-oriented
and capital-intensive agriculture under priority sector
lending.
• This revival did not improve agricultural performance
and did not benefit small and marginal farmers

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Research and extension in Indian agriculture

• Public good & prone to market failures

• Role of state critical
• States with higher research intensity showed
highest productivity growth b/w 1953 & 1971
• Studies have found high marginal rate of returns
to agricultural research and extension in India
• Significant decline in expenditure on R&E

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Farm loan waiver- hurts overall budget & investment

• Different states have announced farm loan

waivers over the years
• Nation wide farm loan waiver in 2007-08
• -ve side effects are on credit culture &
banking sector’s incentive to lend
• Other crucial expenditure share decreases
• Capital expenditure share
• Major inter-department reallocation
observed
Source:
https://theprint.in/opinion/congress-bjp-aap-promise-farm-l
oan-waivers-but-real-cost-on-states/833538/

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Agricultural laws: marketing, storage, trade

• Agricultural marketing highly exploitative

• Farmers received low prices for their produce
• APMC acts mandates that sale/purchase of agricultural commodities notified
under it are to be carried out in specified market areas/yards/sub-yards
• Prices are determined by open auction
• Were implemented across states since 1960s
• Act implemented by APMCs established under it
• Amended over the years
• Acts differ across states- taxes/fees vary
• Most of the states have enacted APMR Acts
• Except Manipur, J&K, Kerala. , Bihar repealed the act

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APMC Acts

• A state is divided into several market areas

• Each market area is administered by a separate APMC,
• Fragmentation of markets, even within a state hinders free flow of agricultural
commodities from one market area to another
• Transaction costs when moving produce from one market to another within the state.
• Increased the gap between farmers’ and consumers’ prices
• Multiple handling of the commodity and charges imposed at multiple levels in the
marketing chain
• Interventions to correct some of these issues
• Model Act- 2003, 2007, 2017, 2020 (repealed)

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Essential commodity Act, 1955

• Movement and storage of many farm products and some inputs have thus been
regulated
• restrict certain activities of some agents in the context of hoarding and black marketing
• ECA brings in uncertainty among market players since it can be implemented
any time the Govt. deems fit.
• This discourages private players from entering the market

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Price factors
• Main objective is food security & stability in prices
• Instruments
• Assured Minimum Support Price
• inter and intra year price stability through open market operations
• Maintaining buffer stocks
• Distributing food grains at reasonable prices through PDS
• MSP based procurement mostly for wheat & rice- < 10% farmers aware
• Geographic concentration in procurement
• Punjab, Haryana, Chhattisgarh, Andhra Pradesh
• MSP was first announced for rice in 1965.
• Central government now announces MSPs for 23 major crop in each marketing
season for kharif and rabi crops

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Minimum Support Prices
• The Commission for Agricultural Costs and Prices (CACP), provides its
recommendations on MSPs to the Department of Agriculture, Cooperation and
Farmers’ Welfare
• CACP- TOR requires that following must be taken into account
• cost of production,
• overall demand-supply,
• domestic and international prices,
• inter-crop price parity,
• terms of trade between agricultural and non-agricultural sectors,
• the likely impact of the price policy on the rest of the economy,
• ensuring rational utilisation of production resources like land and water.
• Cost based MSP imposed from 2017-2018
• ignores other aspects & will not be the first best solution for the market

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Minimum Support Prices

• Cultivation shifted towards wheat & rice % Difference b/w Mandi prices on 3rd July & MSP-2018-19
20 7
• Policies inertia in correcting this bias 0
-20 -10 -5
-20 -24
• Intensive cultivation of these crops led to
-40 -36
-38
-60 -47 -48 -42 -43
-58 -61
depletion of water resources, soil degradation, -80

Groundnut in shell,Jamnagar, Gujarat

Paddy Common,Malda, West Bengal

Paddy Grade A,Birbhum, West Bengal

Jowar Hybrid,akola, Maharashtra

Tur (Arhar),Latur, Maharashtra

Cotton,Jamnagar, Gujarat
Ragi,Mysore, Karnataka

Moong,Surat, Gujarat
Bajra,Bharatpur, Rajasthan

Soybean,Vidisha, MP

Sesamum,Ujjain, MP
Urad,Ujjain, MP
Maize, Devangere in Karnataka
% Difference
deterioration of water quality
• Debate on costs to be used for MSP calculation
• A2+FL cost of cultivation- actual paid-out costs plus
an imputed value of unpaid family labour
• C2 cost of cultivation- accounting for the rentals and
interest forgone on owned land and fixed capital
assets respectively, on top of A2+FL.

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Other Price factors

• Terms of trade was expected to favour agriculture

post reforms
• No marked improvement in the terms of trade for agriculture as
was expected with the onset of reforms.
• In certain phases of post-reform period, the terms of trade for
agricultural producers worsened.
• Agricultural trade liberalization has
• exposed domestic producers to the volatilities of international
prices
• Discouraged oilseed and pulse production- import liberalization

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Manufacturing sector

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Industrial policy in India

• Centrally planned industrialization was the guiding principle just after independence
• Aim was self-reliance, technological catch-up, rapid industrialization, growth &
employment generation, & poverty reduction.
• Regulations focused on industrial licensing, import substitution through licensing
and tariffs, emphasis on public sector enterprises and small-scale industries, and
labor laws.
• Adversely impacted private sector development in India

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Industrial policy in India- trade related

• Trade policies focussed on the self-reliance agenda,

• Discouraged imports through import (and export) licensing, tariffs, and non-tariff barriers.

• Foreign Direct Investment (FDI) policies were equally protectionist.

• Regulations like Monopolies and Restrictive Trade Practices Act of 1969, and the
Foreign Exchange Regulation Act of 1973, imposed a multitude of restrictions on
foreign investment.

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Industrial policy in India- major Laws

• The Industries (Development and Regulation) Act of 1951

• Output capacity regulated and prices of key industries controlled.
• Industrial licensing: license was required to start a new factory/product line/ expand capacity.
• Industrial Policy Resolution of 1956
• Some sectors reserved for public sector.
• Private sector only allowed in restricted sectors only with licenses
• Small-scale industries (SSIs)- 1967
• Reservation of products that could exclusively be manufactured by small scale industries
• Entry of large-scale industries restricted
• List of reserved products was expanded until 1996.

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Industrial policy in India- major Labour Laws

• India has about 200 labour laws, 52 of which are Central Acts.
• Labour issues are part of Concurrent list of the Indian Constitution
• The Industrial Disputes Act (IDA) of 1947 is the core of labour laws in India
• Covers resolution of industrial disputes, hiring and firing workers, closure of establishments,
strikes & lockouts in formal sector.
• requires firms with >=100 workers to seek government permission to lay-off any worker.
• Federal government regulation, but states allowed to make amendments
• State level heterogeneity observed- some states more employer-friendly than others
• Industrial Employment (Standing Orders) Act –
• requires employers in firms with>= 100 workers (>=50 in some states) to seek permission for
changing the job description of any employee

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Industrial policy in India- major Labour Laws

• The Trade Union Act allows any 7 employees to form a union,

• leading to several unions within a firm, thereby using up a large proportion of the firm’s
managerial resources.
• The Contract Labor Act, restricts, & even prohibits, use of contract workers for
certain tasks.
• Firms often have an incentive to remain small and “informal”.
• have a threshold employment level above which they become applicable,

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Impact of labour regulations on Indian manufacturing sector

• Pro-employee labour regulations benefitted informal sector as output, investment,

and productivity in the formal sector went down
• Led to an increase in informalization of the sector

• Output & employment growth in labour - intensive industries slower in states

with relatively restrictive labour regulations as compared to other states.

• Plant-level productivity in labour-intensive industries & facing volatile demand

(requiring constant input adjustment) is about 11-14% higher in the flexible labour
market states than in others

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Impact of labour regulations on Indian manufacturing sector

• -ve economic impacts of amending the IDA regulations in pro-worker directions,

• harder to fire permanent workers — lower output, employment, investment, and productivity in
formal manufacturing, lower sensitivity of industrial employment to local demand shocks &
lower employment in the retail sector
• Increased use of contract workers, who are not subject to IDA regulations
• Adds flexibility to firms’ hiring decisions but productivity costs of hiring contract
workers.
• These fixed-term workers are unable to accumulate firm-specific human capital.

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Industrial reforms in India

• During the 1980s and the 1990s, there were two main waves of reforms.
• 1st in 1980s & 2nd in 1991
• The 1980s reforms-
• License Raj dismantled, removed both entry and size constraints for private sector firms for a
subset of industries, size restrictions were relaxed across the board
• The 1991 liberalization
• prompted by BOP crisis & external pressure of IMF -structural adjustment programe.
• removal of most licensing, tariffs & non-tariff barriers on imports of intermediate & K goods
• FDI restrictions were relaxed & License Raj virtually abolished
• Directives to reduce government ownership to 26% of equity, in all State-owned firms outside
defence, atomic energy, and railway sectors

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Industrial policy in India- End of License raj

• The 1980s reforms resulted in an aggregate productivity improvement

• Attributed to the relaxation of entry constraints
• Resource misallocation declined & there was an increased entry by small firms,
• Large incumbent firms remained dominant and grew in size.
• Resulted in a shrinking middle in firm size distribution in Indian manufacturing
• State level heterogeneity observed in growth
• Industries in states with pro-employer labour regimes grew more quickly

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Industrial policy in India- 1991 trade liberalization

• Increase in industrial competition, and growth rate of firm productivity.

• Trade reforms increased firm-level productivity in the formal sector
• as a result of lower input tariffs.
• Informal sector firms also gained because of tariff reduction & trade liberalization
• Increase in new products being introduced by domestic firms
• Because of access to new imported inputs
• Partial privatization had a positive impact on profitability, productivity, and
investment for firms.
• Reductions in government equity ownership in State-owned firms

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De-reservation & change in size for small-scale industries

• SSI reservation dismantling started in 1997- Encouraged overall employment &

output growth.
• Both new entrants & previously size-constrained incumbents drove this growth
• Definition of an SSI has changed over the years.
• Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006.
• These cut-offs are used for various Government programmes
• For example, all banks are required to lend to the ‘priority sector’ that includes SSIs
• Priority Sector credit benefitted firms
• Studies find that sales and profits of firms increased for firms when they were eligible for
priority sector credit & trends reversed as they lost eligibility in 2000.

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Industrial policy in India- labour market widespread changes

• Decline in the bargaining power of workers,

• Higher labor demand elasticities in the manufacturing sector,
• Decline in likelihood of unemployment in net-exporter industries,
• Increase in schooling and a decline in child labour, and
• Decline in poverty and consumption growth in more liberalization-exposed districts.

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Industrial policy in India- regional disparities

• Regional economic disparities have remained persistent across India

• Some states exhibiting accelerated growth rates, while others growing sluggishly.
• BIMARU states to describe the poor economic conditions across Bihar, MP, Rajasthan & UP
• coined by Ashish Bose
• Place based industrial policies implemented by the Indian government to address
regional economic imbalances
• tax exemptions, infrastructure grants, subsidies, and other incentives to firms to locate to
backward districts, and “special category states.” Special Economic Zones (SEZs) Act, 2005
• Results promising for firm entry & growth

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Industrial Policy in India: Some positive outcomes

• Infrastructure investments (especially highways) have increased allocative

efficiency of industries in India.
• India recently jumped 30 spots and was ranked 100th by World Bank’s Doing
Business Report 2018.
• Reforms related to insolvency resolution (Bankruptcy and Insolvency Act, 2017)
and the Goods and Services Taxes (GST) are impressive and will result in long-term
gains for the industrial sector.

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Industrial policy in India-challenges which remain

• Resource misallocation across firms continues to be pervasive.

• Large gaps in the marginal products of K & L across plants in India.
• Firm size distribution remains skewed towards very small firms
• Large & old firms in India grow much slower than similarly aged firms in the US
• lower investments in process efficiency, quality, and in accessing markets at home and abroad
• Some other challenges
• electricity shortages and prices
• credit constraints
• high unit labour costs due to labour regulations
• political interference and other regulatory burdens

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Manufacturing sector- concerns with change in base year

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Manufacturing sector- concerns with change in base year

• With every change in base year, some methodological changes are made & database
changes
• In 2015, when Central Statistics Office (CSO) published the GDP figures, changes
in levels & growth rates of GDP was noted.
• But this time changes were dramatic and unexpected
• Introduction of the new series of National Accounts Statistics (NAS) with 2011–12
as the base year, replacing the earlier series with the base year 2004–05.

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Changes noted

• Increase in GDP growth rates for overlapping

years
• Both in real & nominal GDP growth rates,
• A staggering 8.2% growth rate in 2016-17
• year of demonetization
• Major change in sectoral contributions
• Major revisions in growth rates
• Manufacturing sector- –0.71% to 4.9% in 2013-14.
• Trade, hotels & transport sector- 3.02% to 6.51% for
2013-14

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Changes noted

• In terms of sectors, in 2011-12, share in GDP of industry went up, with a

corresponding decline in the share of services sector.
• Increase in industry’s share was mainly on account of manufacturing
• Annual growth rates also significantly higher - change even in direction of growth in some
cases.

• In terms of institutions, share of Private Corporate Sector (PCS) increased by about

11-12 % points of GDP (as of 2011-12), with a corresponding decline in share of
household /unorganised sector
• Within PCS, share of private financial enterprises remained roughly the same
• The share of non-financial PCS went up significantly from 21.9% to 31.9%.

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What was the old approach?

• Unit of data collection in the ASI is a factory

• The physical (or technical) unit of production.
• ASI collected data on registered manufacturing sector units, consisting of all
factories based on their mandatory registration under the Factories Act, 1948.
• ASI consists of two parts, namely (i) the census sector, and (ii) the sample sector.
• Data for factories employing 50 or more workers using power (100 or more workers without
using power) are collected on a census basis, whereas those employing 10–50 workers using
power (or, 20–100 workers without using power) were surveyed on a sample basis.
• Data on company finances was collected by the Reserve Bank of India (RBI) based
on a thin sample of around 4,500 companies

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The New approach

• The unit of data collection for manufacturing has changed to an enterprise (firm)
• an organizational unit of production.
• An enterprise could undertake many activities, of which factory production is one.
• Implies a move from gathering information from the technical unit of production (factory) to an
organizational unit of production (firm).
• Data source for company finances has been revised
• Data captured through e-filing portal of Ministry of Corporate Affairs (MCA), popularly known
as MCA21, for building up population estimates for the private corporate sector. 

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Is the New approach better?
• Question remains open
• CSO claims
• Better captures value addition in manufacturing than before.
• Value addition taking place outside of the factory—such as company head office, R&D centres,
sales & services locations, and so on.
• CSO asserted that value addition previously was incomplete, hence underestimated.
• Concerns
• Scholars suggest that there are shortcomings in the quality of the MCA database
• Multipliers used for blowing-up the sample estimates of the universe of corporate sector are not
available in the public domain
• No evidence in support of arguments made by CSO

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Some additional references

1. https://www.ideasforindia.in/topics/macroeconomics/industrial-policy-in-india.ht
ml
2. https://www.ideasforindia.in/topics/macroeconomics/impact-of-labour-regulations
-on-indian-manufacturing-sector.html

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Service sector in India

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Service sector

• Almost like a black box- Very heterogeneous

• retail workers, consultants, IT specialists, domestic housekeepers are all service
workers
• Studying the sector becomes difficult because of the heterogeneity
• A large proportion of the sector is informal- Credible data availability is a concern
• Policy implications will be different based on understanding of different activities
under service sector
• Several studies have tried to regroup activities under broad sub-sectors

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Service sector- a black box- very heterogeneous
Structural Employment Factor use Productivity
Public or Educational barrier to entry- ease of securing Capital intensity- K/L ratio Trade in international
private employment- % of employees who are markets-exports plus imports
graduates and illiterates of services in a sector as a
percentage of its GDP
Organized and Skill intensity- Scope of economies of scale- Contribution to technological
unorganized High skill- Distribution of its workforce for two number of workers- cut off is progress-R&D expenditure
occupation categories: professional and 20-clearer distinction between as a percentage of the gross
technical workers, & administrative, executive smaller and larger operations value added
& managerial workers.
And rest are low skilled
Intermediate Incorporation of
demand vs final technological advance-Trend
consumption rate of growth of output per
worker over a period of time

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Heterogeneity in service sector

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 What is service sector?
• Services cannot be defined as a composite category & policy implications different for
different category

Tirtha Chatterjee
Service sector, structural growth and Kaldor’s laws

• Kaldor (1966) : manufacturing as the main engine of growth for an economy.

• Taxonomy suggests that dichotomy b/w services & manufacturing may not
necessarily hold
• Service sector could prove to be an engine for structural transformation
• Nature of service sector has changed today
• Services now organized in a manner that resembles manufacturing sector
• Telecommunication, financial, software, or business services
• scale economies or technical progress are easily incorporated to increase efficiency in providing these services
• Has spillover effect to other sectors
• More profitable for firms to procure services (law, accounts, finance) than produce them

Tirtha Chatterjee
What caused services to grow in India?
• Different service sub-sectors could have grown because of different reasons.

• Splintering of services from industry to service sector

• ‘largely intermediate’ (storage and financial services) or ‘part final, part intermediate’ (communications and
business services)
• High income elasticity of demand
• ‘largely final’, such as hotels and restaurants, and community services.
• Role of foreign demand
• business services sector, as it is characterized by ‘high’ trade in international markets
• Privatization
• ‘largely private’ or ‘part public, part private’ (e.g. communications and financial services)
• Availability of skilled workers
• ‘high’ educational barriers to entry for job seekers such as financial and business services

Tirtha Chatterjee
What has been the impact of service led growth? (Fan et al, 2021)
• This study distinguishes b/w two broad types
• Difficult to measure productivity growth in service sector.
• tradeable and non-tradeable
• Tradeable- producer services- corporate lawyers and
ICT workers, who often cater to other firms. –
intermediate inputs
• Non-tradeable- retail employees, whose services almost
entirely demanded by local consumers- ‘consumer
services’.
• Three patterns noteworthy
• employment increased in all service activities.
• Services are particularly concentrated in cities.
• Consumer services have the lions share despite
India often hailed as a producer service hub with its
call centres and expertise in ICT
Source:
https://www.ideasforindia.in/topics/macroeconomi
cs/india-s-service-led-economic-growth.html

Tirtha Chatterjee
What has been the impact of service led growth? (Fan et al, 2021)

• Suppose no productivity growth had been taken place between 1987 and 2011 in a
particular sector. By how much would this have reduced real income of consumers in
2011?
• Real income would have been 30% lower if productivity in services had been
stagnant since 1987.
• For agriculture this number is around 22%, and for manufacturing it is 18%
• The lack of pronounced industrialization does not mean that growth is bound to fall.

Source: https://www.ideasforindia.in/topics/macroeconomics/india-s-service-led-economic-growth.html

Tirtha Chatterjee
Service led growth biased towards the rich (Fan et al, 2021)

• Service-led growth is strikingly pro-rich.

• While growth in consumer services accounts for almost 40% of real income
growth for consumers at the top of the income ladder, this effect is only half as
large for consumers below the median.
• The exact opposite is the case for productivity growth in the agricultural sector,
• main beneficiaries are low-income households.

Source: https://www.ideasforindia.in/topics/macroeconomics/india-s-service-led-economic-growth.html

Tirtha Chatterjee