Changing pattern of GDP growth

By V. S. Sambandan

Behing the statistics on the Gross Domestic Product (GDP) for 1999-2000 released by the Central Statistical Organisation (CSO) last week lies the story of India's ongoing transformation from an agriculture driven economy to one in which the share of the services sector is increasing by the passing decade.

Gaining from a share of 31.9 per cent to the GDP in 1970-71 to 47.1 per cent by 1999-2000, the services sector has come to take the place of agriculture as the largest contributor.

The spurt in the contribution of the services sector to the GDP has been especially marked since 1990-91. The services sector comprises three sub-sectors (based on the classification adopted by the Economic Survey) - trade, hotels, transport and communications; financial services and community, social and personal services. If one were to bring `construction' activity (classified by the Survey under the secondary sector) under the tertiary sector, as some other classifications do, the share of services would increase a further five percentage points, taking their contribution past the 50 per cent mark. In 1999-2000, the combined contribution of the tertiary sector (47.1) and the `construction' segment (5.17) the second-largest contributor to the manufacturing sector, would amount to 52.27 per cent.

India's transition from agriculture to services as the main contributor to the GDP is also to be seen with the increasing share of the trade, hotels, transport and communications segment in the services sector - from 14 per cent to 21 per cent between 1970-71 and 1999-2000. The rise has been especially sharp in the Nineties when the segment raised its contribution from 17.8 per cent in 1990-91 to 21.37 per cent last year.

The inter-decadal growth of the services sector's share of the GDP has been marked by a simultaneous fall in the primary sector's contribution (agriculture , forestry and fishing) and a smaller rise in contribution from the secondary sector (mining and quarrying, manufacturing, electricity, gas and water supply and construction).

If the three broad categories - primary, secondary and tertiary - were to be seen with their sub-classifications, Agriculture and allied sectors, constituting the primary sector, contributed 25.52 per cent of the GDP in 1999-2000. Under the secondary (industry) sector, manufacturing was the single-largest contributor (17.49) followed by construction (5.17), electricity, gas and water supply (2.52) and mining and quarrying (2.20). In the tertiary (services) sector, the trade, hotels, transport and communication segment made up for 21.37 per cent, followed by community, social and personal services (13.18) and financing, insurance, real estate and business services (12.55).

Contribution of services - real or exaggerated

Shifting sectoral contributions gain significance as high-growth economies are those which have services as the main contributor to the GDP. Given this global setting, the rising share of services is to be viewed against past experience of the developed economies where the tertiary sector gained a pronounced share in GDP only after gains had been made first from the primary to the secondary sector. In India, on the other hand, there has been a direct switch from the agriculture sector to the services sector as the dominant contributor to the national product. This leapfrogging in sectoral contributions, bypassing the stage of increased industrial contribution, has led to divergent views on whether the rising share of services reflects any real development or not.

Pointing out that the sectoral contribution in India is "in line with the general trend of the world," Dr. Raja J. Chelliah, Chairman of the Madras School of Economics, says, "As the economy develops, generally the per capita income increases and there is greater specialisation" which "tends to push up the share of the services."

While higher per capita incomes result in increased spending on services, greater specialisation in the productive sectors results in contracting out services which were originally performed within the manufacturing sector.

Yet another reason is the "emergence of the financial sector as a rapidly growing sector in the world economy," he said, contending that it could be concluded that "the growth of the share of the services sector in the Indian economy reflects real development."

The bypassing of the industrial stage, however, is not taken lightly by all economists. In fact, some see the Indian experience as one that is not reflective of any positive economic transformation.

Arguing that unlike in India, the increasing contribution of services to the GDP of the developed countries was preceded by growing primary and secondary sectors, Dr. K. Nagaraj, Professor, Madras Institute of Development Studies, contends that the rising share of the services sector should also be seen in the context of the dichotomies within the economy as well as within the services sector. Especially significant is the rapidly growing informal sector and particularly alarming is its expansion to the rural economy.

Rather than arising from the growth of the primary (agriculture) and secondary (industry) sectors, the growth in the Indian services sector is seen as one which has been on account of rising government expenditure, Dr. Nagaraj said, adding that "phenomenal increase" in government spending, for instance, is cause for concern.

According to Dr. Chelliah, increases in both government employment and increases in the "real incomes of government servants may not be reflecting any increase in the contribution of the government sector to the economy."

Moreover, there is "clearly an exaggeration of the contribution of the services by the government sector".

The growing contribution of services to the GDP is also marked since the Eighties, coinciding, as Dr. Nagaraj points out, with the slowdown in reduction of rural poverty levels. Yet another factor which gives no cause for cheer is the increasing informalisation of the rural sector - signifying the saturation of urban absorption capacities.

The slowdown in rural poverty levels throws up an alarming signal on development.

Given the increasingly skewed contributions by the three sectors to the GDP, correctives will have to be considered. Above all, computation problems persist.

While conceding that there is reason to think that the CSO is not correctly measuring the relative contribution of the services sector, Dr. Chelliah said the increase its share as revealed by the CSO figures did reflect a real underlying trend.

Facing as it does a change from the past global experience of moving from the agricultural and industrial stages of development, India's leapfrogging into the services sector throws up several crucial issues.

The primary one to be addressed by economists and policy makers as India proceeds with its liberalisation policy relates to assessing the quantum of real and exaggerated contribution of the services sector to the overall development of the economy.

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