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Rebooting Economy 58: The untold story of India's services sector

Prasanna Mohanty     January 13, 2021

How neglected is India's services sector can be easily determined by asking a simple question to policymakers, planners, or economists: What was the services sector's contribution to the GDP in 1950-51?

It is highly unlikely that anyone would even guess it right: 36%. Its contribution then was next to agriculture but it surpassed agriculture in mid-1960s, crossed 50% in mid-1960s, zoomed past 60% in FY05, and continues its lofty perch since then. It has also been the main engine of India's growth for several decades and, going by the International Labour Organisation (ILO) projections, it became the largest employer in 2019 (closest to India's FY20), surpassing agriculture.

Yet there is no national policy, department, or ministry dedicated to services or national debate on it. It has grown virtually on its own, as India's IT sector would vouchsafe. But before going further, here is a reality check.

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The invisible sector that contributes the most to GDP

The following graph maps the GDP share of services and manufacturing since 1950-51 using the 2004-05 and 2011-12 GDP series at constant prices.

Why this comparison with manufacturing?

That's because traditionally economic growth is associated with manufacturing, not services. The developed nations of the west (like the UK, US, Germany, and others) and the success stories of the east (Japan, South Korea, China, and others) have had a manufacturing-led high growth story.

In sharp contrast, India's growth story has been riding on services for several decades, but that has made little difference to the perceptions of policymakers, planners, and economists.

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The remarkable element of the above graph is the huge gap in the contribution of services and manufacturing to the GDP. In the 2004-05 GDP series (constant prices) the services' share was four times more in 1950-51 and increased to 4.3 times in 2013-14. After the new series (2011-12) was introduced and some sub-components of 'Trade, Hotels, Transport and Communication (THTC)' were shifted from services to manufacturing, raising the latter's share, the services' share of the GDP was still 3.6 times more than manufacturing's in 2019-20.

Services is the main driver of India's growth

When it comes to sectoral contributions to the GDP growth, the services sector provides the maximum thrust.

Between 1950-51 and 2013-14, its annual average contribution to the GDP growth was 54.4% (2004-05 series at constant prices). Between 2011-12 and 2019-20, its contribution to the growth increased to 67.7% (2011-12 series at constant prices).

In sharp contrast, the manufacturing sector's contribution was 13.1% and 18.1% for the corresponding periods.

Services is the largest employer too

In 2019 (closest to India's FY20), services surpassed agriculture for the first time as the largest employer, according to the ILO's projections, which even the RBI and Economic Surveys use in their reports because no government agency provided such estimates after the Planning Commission was dismantled in 2014.

According to the ILO database, services provided employment to 44.2% of the total employment in 2019 as against agriculture's 43.2%. In contrast, manufacturing's share was just 11.4%.

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The earlier years' sectoral shares of employment have been taken from the Planning Commission and Economic and Political Weekly's December 1966 issue.

Global bias against the services sector

Unlike other sectors of economy, there is a paucity of literature on services not just in India but globally, reflecting poor faith of economists in its ability to drive growth.

A World Bank's working paper released in 2014, "Can Service Be a Growth Escalator in Low Income Countries?", tried to explain this while endorsing its role as the main growth engine. It said: "It has been argued for more than 200 years that economic growth is associated with the manufacturing sector. Services have been considered non-tradable, menial, low productivity, and low-innovation."

It sought to impress that the conventional path of manufacturing-led growth and development seems to have hit a roadblock in many parts of the world, especially in low-income countries in Africa and South Asia. Some of these countries, like the Lions of Africa (Tanzania and Ethiopia) and India have witnessed growth driven by services, unlike the East Asian Tigers or the western developed economies.

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The working paper does not argue that services is superior to manufacturing in driving growth, or the other way round, but that the latecomers to development now have more levers to pull because of globalisation and the Third Industrial Revolution that brought information technology (IT) and information communications technology (ITC).

It argued that the Third Revolution led by services can upset five long-held tenets of economic development: (i) traditional thinking that the services sector is a product of growth and can't drive growth on its own is no longer valid; services can be produced and traded just like manufacturing goods and is contributing more than manufacturing to growth and jobs in both low and high-income countries (ii) global trade in services has exploded and is growing faster than trade in goods (iii) technology, trade, and supply chains have changed services from being lower in productivity than manufacturing; innovation in communication and transport have contributed to global supply chain in services just like in manufacturing (iv) it is no longer true, in both low and high-income countries, that goods jobs are created only in manufacturing and (v) services-led growth is also compatible with greener, inclusive and more gender-friendly growth.

How India treats its services sector

India belatedly recognised the services' sector's contributions and is yet to devote time or energy to develop it.

The earliest recognition perhaps came with the working paper published by the Asian Development Bank (ADB) in 2013, which is well reflected in its title, "The Service Sector in India".

It said: "The service sector is the largest and fastest growing sector in India and has the highest labour productivity, but employment has not kept pace with the share of the sector in gross domestic product and has not produced the number or quality of jobs needed. There is no policy leading to inclusive growth, and multiple, uncoordinated governing bodies adversely affect the growth of the sector...

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"Most of the poor in India do not have access to basic services such as healthcare and education and infrastructure is weak so the cost of service delivery is high. Although India wants to be a knowledge hub, there is no uniformity in the quality and standards of education and formal education does not guarantee employability. Policy measures are suggested for inclusive growth that will also enhance India's global competitiveness in services."

The 12th Five-Year Plan's Volume II (also published in 2013) was devoted to "Economic Sectors", but did not even have a chapter on services. Various components of the service sector were treated as adjuncts to eight sectors, each of which had a dedicated chapter: Agriculture, industry, energy, transport, communication, rural development, urban development, and other priority sectors.

The Economic Survey of 2019-20 devoted an entire chapter to services and said, among others: (a) the services sector's significance in the Indian economy has continued to increase with it contributing around 55% of the total size of the economy and GVA growth (b) its share exceeds 50% of Gross State Value Added in 15 out of 33 states and UTs and more than 80% in Delhi and Chandigarh (c) it accounts for two-thirds of total FDI inflows and 38% of total export and (d) services' exports have outperformed goods export in recent years, raising India's share in world's commercial services exports to 3.5% in 2018, twice that of merchandise export at 1.7%.

It also recorded that high-frequency data and other economic statistics suggested "a moderation in services sector activity during 2019-20" with bank credit to the sector, air passenger traffic, and rail freight traffic witnessing "a deceleration".

It offered no solution, devoting the entire chapter to analysing the data for different components, other than expressing optimism for improvement.

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That was not to be. The pandemic hit and the AatmaNirbhar Bharat packages of more than Rs 20 lakh crore also ignored it, in keeping with the traditional approach to the sector.

In August 2020, Geetanjali Nataraj, director of a central government body, Services Export Promotion Council (SEPC), wrote in a national daily with an apt sub-head "An Unserviced Sector".

In it, she wrote how the AatmaNirbhar Bharat packages had overlooked the plight of the services sector even though it was the main driver of India's growth and was "struggling hard to keep its head above water".

She issued a warning: "From tourism, aviation, shipping, space to call centres and delivery services, the standstill in activities is bound to have a knock-out effect on employment, production, and the economy as a whole. The big picture suggests that the current relief provisions for the primary and secondary sectors would also be nullified as a consequence of neglecting the tertiary sector (services)."

She also pointed out that due to this neglect, the services sector contracted for the fifth successive month in July 2020.

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How services would perform in FY21

Now that the 'First Advance Estimates of National Income 2020-21' is out, released on January 7, 2021, here is what Nataraj anticipated.

The National Statistical Office (NSO) estimates the overall GVA to shrink to minus 7.2% in FY21 (GDP to shrink to minus 7.7%).

About sectoral performances, it provides a mix picture. The agriculture-GVA and utilities-GVA (component of industry) would register positive growth (3% and 2.7%, respectively). The manufacturing-GVA (main component of industry) will shrink by minus 12.4%.

When it comes to services, all its four components will shrink.

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The GVA of 'Financial, Real Estate, and Professional Services' will shrink to minus 0.8%, 'Public Administration, Defence and Other Services' to minus 3.7%, 'Construction' to minus 12.6% and 'Trade, Hotels, Transport, Communication, and Broadcasting' to minus 21.4% (all at constant prices).

How long will India ignore the services sector?


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