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Services booming! Or are they?
December 23, 2003
The hype about India's newfound services prowess continues unabated.
You could be forgiven for thinking that every second member of the country's labour force is either scaling new infotech frontiers in Bangalore or learning Texan accents in a call centre in Noida or Gurgaon.
Normally sober analysts are painting visions of a global future where China supplies all the world's demand for goods, while India meets global needs for services.
There is of course a germ of truth in all this, mixed in with large dollops of hyperbole, exaggeration and unrealistic hopes.
To restore a modicum of realism and perspective on the matter, let's begin with a few numbers.
The table below shows the evolving structure of India's services sector and the varying growth rates of individual subsectors.
By 2000-1, services activities accounted for nearly half of India's economy.
But notice that the vaunted subsectors of IT and BPO are nowhere in sight.
Services in India
% Share in GDP
Average Annual Growth (%)
Trade (Wholesale /Retail)
Hotels and Restaurants
Other Transport & Storage
Communication (Post, Telecom)
Dwellings, Real Estate
Public Administration; Defence
Source : J. Gordon and P. Gupta, "Understanding India's Services Revolution", November, 2003, at www.imf.org/delhi. (Based on CSO data)
Actually, they are tucked away under 'Business Services', which accounted for just 1.1 per cent of GDP in 2000-1. That's about the same as 'personal services', which hardly anybody mentions.
What's more, business services measure up to only a fifth of 'community services', even less of 'banking' and 'public administration; defence', and less than a tenth of distributive 'trade'.
Indeed, the increment in the share of the trade sector in the nineties is substantially greater than the entire business services sector in 2000-1!
With services accounting for around half of GDP in India and many developing countries and up to 70 per cent of GDP in some industrialised economies, one would have expected far greater economic analysis of this predominant chunk of real world economies.
Alas, the economists tribe have preferred to plough the familiar fields of industry, agriculture, public finance, trade in goods, etc.
The doctoral dissertations on productivity are usually about manufacturing or agriculture. There is lots of debate on industrial recessions. . . when did you last read about services recession? Such biased focus is really quite astonishing.
All the more reason to rejoice when a serious paper comes along on services. J. Gordon and P. Gupta (henceforth GG) presented their thought-provoking paper, 'Understanding India's Services Revolution' at an IMF-NCAER seminar last month.
For the benefit of the readers, let me summarise some of the broad facts and themes from their research.
First, there had been a marked acceleration in services sector growth in the eighties and nineties, especially in the latter.
Thus, while the share of services in India's GDP increased by 21 per cent points in the 50 years between 1950 and 2000, nearly 40 per cent of that increase was concentrated in the nineties decade.
Second, while almost all service sectors participated in this boom, growth was fastest in communications, financial services, hotels/restaurants, community services, trade and business services.
These segments fully account for the acceleration in services growth displayed by the CSO data in the nineties.
Third, while up to 1990 India was neatly on the cross-country fitted line plotting services share against per capita income, the nineties acceleration took her services share a good 5 per cent points above the cross-country norm.
Fourth, India's services boom was relatively 'jobless': the rise in services share in GDP was not accompanied by any increase in the sector's share of national employment.
In a cross country 'fit' of services share in employment against the share in GDP, India is a clear outlier, well below the fitted line.
The GG paper is rich in analysis, including an interesting exploration of factors that may have fuelled the recent services boom in India.
But let me also voice a couple of reservations. In their historical analysis of the data GG ignore an 'outlier' characteristic I have pointed to on a number of occasions.
By this I refer to the curious fact that while the growth of services in India has been very close to the trajectory of industrial growth from 1950 all the way up to 1996-7, there is a marked divergence in the trajectories in the Ninth Plan period, 1997-2002 when services grew at 8 per cent and industry at only 4.5 per cent.
Such anomalous trends are also not seen in other developing countries and call for some explanation.
Above all, it raises the issue of sustainability of strong services growth in the absence of a sustained industrial recovery.
Secondly, GG conduct their analysis of the CSO data on services without assessing their quality. It's a well-known fact that the estimates of value added in services sectors in India (and most developing countries) are based on much weaker data than corresponding estimates for the main commodity producing sectors of industry and agriculture.
Let me convey a flavour of this by quoting from a CSO publication describing how gross value added (GVA) in the subsector 'ownership of dwellings'(as an example) is estimated: "The GVA for the ownership of dwellings is equivalent to the gross rental of the residential census houses less the cost of repairs and maintenance. The number of 1991 census residential houses in urban and rural areas are projected to get the estimates for 1993-94 by applying the average compound growth rates between 1981 and 1991 residential houses. . ."
This is combined with "rent per household obtained from results of the Household Consumption Expenditure Survey 1993-94 (50th Round NSS) . . .to estimate gross rental separately for rural and urban areas.
Cost of repair and maintenance. . . has been subtracted from gross rental to obtain estimates of GVA for rural and urban areas in the base year (1993-94).
For subsequent years (after 1993-94) the constant price estimates have been obtained by multiplying the rent per household with projected residential census houses (. . .projected by applying the average compound growth rate between 1981 and 1991)."
Thus for, say, 1998-99 estimates of GVA in this sector, the rental information comes from the 1993-94 survey and the housing stock data relies on the growth of houses between 1981 and 1991.
No data for the actual year 1998-99 is used! Similar methods are deployed in some other service sectors.
My purpose is not to critique the CSO's methods (perhaps nothing better could be done).
Rather it is to point to the underlying infirmities in the available data in order to generate some healthy doubts when we are confronted with unusual trends.
Or take the 'trade' sector, which accounts for 13.7 per cent of GDP, not much less than the share of all Manufacturing! According to the table, the trade sector grew at a robust 7.3 per cent annual rate in the nineties.
GG also say the rate accelerated in the second half of the decade.
How reasonable is this? Remember, growth of commodity sectors had slumped in the latter half of the nineties, imports of non-oil goods were stagnant, inflation was low and a liberalised trade regime was squeezing margins.
How does wholesale/retail trade boom in this situation? Certainly calls for more serious research and scrutiny.
More broadly, the methodology of service sector estimates changed significantly in the mid-90s at the time of transition to the new base year, 1993-94.
There is need for serious enquiry to reject the hypothesis that this change in methods may have imparted systematic upward bias to GVA estimates in key service sectors.
So what's going on in services? Plenty. But we need a lot more serious study (in and outside the CSO) to distinguish the real trends from the apparent ones.
The author is former Chief Economic Adviser to the Government of India and a professor at ICRIER. The views expressed are strictly personal.
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