On a recent trip – 2-9th January 2012 – to Chennai (formerly Madras) in India, I attended part of a small conference, which focussed on the role of the services sector on the growth of the Indian economy. This conference was organised by Lancaster University’s India Centre
The opening speaker was Dr D.K. Srivastava, Dean of the Madras School of Economics – who gave a very interesting presentation on the role of the service sector in the growth of the Indian economy in relation to growth rates in agriculture and industry. This was followed by related presentations by Professor Vudayagi Balasubramanyam - from Lancaster University, UK, and others.
The current situation in India is that the growth rate of services has overtaken both agriculture and industry and is now more than 50% of GDP. The services sector has the highest growth rate and is the least volatile sector. Growth is particularly marked in public services, IT and financial services. In some areas the growth rate of the services sector is 40-50% due to increased use of mobile technologies.
India therefore has a services-oriented economy. It hasn’t followed traditional growth models (as in China) in that it has skipped the manufacturing stage and has jumped straight from the agricultural stage to services. Growth in the services sector will support growth in the agricultural and industrial sectors, although growth in manufacturing, which causes pollution is not so desirable in terms of job creation and increased prosperity.
As India’s population grows so too does the number of dependents in the lower and higher age groups. For the economy to grow it has to invest. Currently the public sector invests more than it saves. The household sector saves in surplus, but this is not increasing so it cannot continue to support private and public sectors. There is a massive need to spend on health and education, particularly the education of women, in order to reduce the birth rate. In South India the number of women in the population outnumbers men, so the development of the south of India will depend on the education of women.
In the next two decades (a ‘growth window’ for India which may not come again because the working population to total population ratio increases up to mid 2030s) it will be important for India to absorb the growing labour force if the services sector is to play an important role. India is in a strong position to do this since it has a history of using English for communication, which in turn supports global trade and finance. Only the services sector can have a major impact on poverty. Improvements in agriculture are not having an effect on poverty. To address poverty there is a need to move people from bad sectors to good sectors or from unemployment to employment. This is happening with growth in human skills intensive sectors such as hotels, restaurants and IT, but there are geographical, labour unions and human skills restrictions on labour movement.
The key question raised at the conference was – Can services lead the economy?
For example, can services, such as IT, be taken to rural areas? This has been done in Andhra Pradesh, where the people have been educated through TV and IT with resulting reductions in infant mortality, poverty and fertility rates. So it seems that services could lead the economy, but there needs to be greater equality between the different States and a better gender balance. There is also the need for additional fiscal capacity, tax reforms to fund education, reduction in government debt and the revenue account must be kept in balance. Progress is good but still initial conditions for growth have not yet been achieved.