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Can the services sector fend for itself?

Harish Damodaran

NEW DELHI, July 2

A SIGNIFICANT feature of the revised estimates of national income for 2000-01, released by the Central Statistical Organisation (CSO) on Friday, has been the relative deceleration in the services sector after three consecutive years of heady growth.

The services sector grew by 9.8 per cent in 1997-98, 8.2 per cent in 1998-99 and 9.6 per cent in 1999-2000 and it is this buoyancy that has really kept the economy going in recent years.

1997-98, in particular, saw the country's real GDP (gross domestic product) growth touch an abysmal 4.8 per cent, courtesy a decline in agricultural output coupled with poor industrial growth. But the same year witnessed a services sector growth of 9.8 p er cent. In the subsequent two years, too, the buoyancy in services made up for the relative sluggishness of industry and agriculture, resulting in overall GDP growth levels of 6.4-6.6 per cent.

But 2000-01 has been a different story. Not only has industrial and agricultural growth been lower, but even the growth in services has dropped to 7.7 per cent, from the previous year's level of 9.6 per cent. This, in turn, raises doubts about the sustai nability of the basic growth model of the 1990s, which has largely focussed on the `intangible' services or tertiary sector as against the `tangible' agricultural (primary) and industrial (secondary) sectors.

From the accompanying Table, it can seen that the post-reforms period from 1992-93 has recorded an average annual GDP growth rate of 6.3 per cent, as against 5.9 per cent during the 1980s. This has come in spite of lower growth rates for both industry an d agriculture. In contrast, there has been a significant step-up in the growth of services from 6.4 per cent to 8.1 per cent (the growth figures for the `crisis years' of 1990-91 and 1991-92 have not been considered in order to facilitate more authentic comparison).

In the process, the share of services in the economy has risen from 32.9 per cent in 1970-71 to 36 per cent in 1980-81, 39.7 per cent in 1990-91 and 48.5 per cent in 2000-01. Over the same period, agriculture's contribution has gradually come down from 4 5.2 per cent to 38.1 per cent, 31 per cent and 25.3 per cent, respectively. Industry's share, on the other hand, rose steadily from 21.9 per cent in 1970-71 to 25.9 per cent in 1980-81 and 29.3 per cent in 1990-91. But by 2000-01, this had dropped to 26. 2 per cent.

Thus, the 1990s have been no different from the previous decades in so far as agriculture's profile in the economy has fallen and that of services has risen. But what is notable is that the sheer scale of increase in the share of services to GDP -- almos t nine percentage points -- has brought about a decline in industry's contribution as well, from 29.3 per cent in 1990-91 to 26.2 per cent in 2000-01.

It is this departure from the conventional growth path -- involving the phased transition from a predominantly agriculture-oriented economy to one based on industry and then services -- that has prompted some commentators to argue that the country has tr uly emerged as a `post-industrial society' in the last decade.

The transformation to a services-oriented economy, without this necessitating the usual industrial transition, has even been trumpeted as desirable by those who believe that India's `comparative advantage' lies in services and not manufacturing, unlike C hina.

That, however, raises the crucial question of how sustainable is a growth model based entirely on services. Can the tertiary sector continue to generate sufficient demand `from within' without concomitant growth in incomes (and derived demand for various services) from agricultural and manufacturing activities.

If 2000-01 is any indications, the potential for such `autonomous' growth of services, sans linkages to the tangible sectors of the economy, is not unlimited.