Chapter-I
INTRODUCTION
India's disadvantage during two centuries of British rule was not only limited to
the depletion of the masses and increasing unemployment but also caused stress in the
process of uneven spatial development. The differential economic spectrum in the states
was the result of public investment geared to serve colonial interest. Therefore, after
independence, India emerged as a federation of a few relatively 'rich and industrialized'
states and of many poor states which depended mainly on agriculture with old techniques
and semi-feudal agrarian relations.
The theoretical formulation and the policy concern post independence should
have been to correct the spatial imbalance. The planning process should have been
designed to bring higher growth in the poor states in comparison to the rich states. It
meant that poor states must achieve a higher rate of investment than the rich ones. Since
the rate of saving in poor regions is less than the rich regions, private investment rate in
poor areas is less than rich areas. Savings of the poor regions mostly get invested in
industrialized regions therefore the rate of private investment in the poor economies is
lower than in the rich ones. If the investment rates in the poor states are boosted either by
private or public investment then uneven regional growth could be checked. Since, the
taxable capacity and the amount of productive assets in the poor states remain lower than
in the rich states, the rate of resource mobilization in the poor states will also be lower
than in the rich states. Therefore, the rate of public investment and rate of growth of
production in the rich states will remain higher than the poor ones causing the regional
inequality to increase, unless the process is checked by transfer of adequate resources
from the rich to the poor states. The implications were echoed in Finance Commission
and planning commission reports, but its full implication has never been realized by the
constitutional bodies and the institutions of the union government which are involved in
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this process of transfer. The result is that the process of uneven regional growth continues
even after six decades of independence.
Government's economic policies during the colonial period were to protect British
interests rather than the welfare of the Indians. The primary concerns of the government
were law and order, tax collection and defence. As for development, Government
adopted a basically laissez faire attitude. Railways and road network were developed to
facilitate movements of goods and defence personnel than to facilitate better
administrative control. Irrigation canal system was developed mainly to fight droughts
and famines and to boost land revenue. Education, to begin with, was developed mainly
to train lower ranking functionaries for the colonial administration.
There was lack of a sustained policy to promote indigenous industry. It is believed
that government policies were responsible for the decline of Indian traditional industry.
Pre-independence period was that of stagnation of economy. The growth of aggregate
output during the first half of the twentieth century is estimated at less than 2 percent per
year, and per capita output by half of a percent a year or less. There was hardly any
change in the structure of production. Productivity levels and the growth of modern
manufacturing were counter-balanced by the displacement of traditional crafts.
Along with a poverty-stricken economy, independent India also inherited some
assets in the form of a transportation system, an administrative apparatus in working
order, a shelf of concrete development projects and a comfortable level of foreign
exchange. It can be argued whether the administrative apparatus of the British helped or
hindered development since 1947, there is little doubt that its existence was a great help
in restoring civil order, organizing relief and rehabilitation for millions of refugees and
integrating the former princely states to the Union. The development projects initiated in
1944 for Post-war Reconstruction Program was of particular value to Independent India's
first government. Under the guidance of the Planning and Development Department
created by the Central Government, a great deal of useful work was done before
independence to outline the broad strategy and policies for development of major sectors
and translate them into programs and projects.
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At the time of Independence several of projects and programs were ready to be
taken up. They included programs and projects in agriculture, irrigation, fertilizer,
railways, newsprint and so on. First Five Year Plan began in 1950-51 but planning
commission came in place during second Five Year Plan. Main basis of the first Five
Year Plan was the groundwork done before independence. Almost all the principal
projects were continuations and great deal of efforts were made to complete them early.
During last two decades Indian economy has experienced an average annual
growth rate of around 6 percent. It was quite impressive compared to the performance of
economy during the preceding three decades when the average growth lagged 3.5 percent
per annum. The growth rate of 3.5 percent during the first three decades of the republic
had been better than the virtual stagnation of the Indian economy during the first half of
the twentieth century. In per capita income, the improvement has been even better around
4 percent per annum in the recent period as compared to less than 1.5 percent in the
earlier period. During the recent period, acceleration can be seen in the growth
performance over the years. The average compound growth per annum was 5.7 percent
during the sixth Five Year Plan (1980-85), 6.0 percent during the Seventh Plan (1985-90)
and 6.6 percent during the Eighth Plan (1992-97). Growth rate dropped to 3.1 percent
during 1990-92 as a result of international payment crisis and introduction of major
economic reforms. Indeed, the growth averaged about 7.5 percent during the three-year
period ending 1996-97, which is good by any standards. The growth rate has been lower
between1998-2000. In contrast to stagnation/negative growth of East Asian economies
India's performance, however, is remarkable. The World Bank and other international
agencies had characterized India as one of the fastest growing economies of the world.
Along with faster economic growth and reduction in poverty, there has been
considerable improvement in various human development indicators, social development
indicators and demographic characteristics since 1980s. During the last twenty years, the
country has made major strides in health and education sectors. The share of the service
sector in employment and incomes improved considerably in the economy. There is a
broad consensus in the overall improvement of the economy and quality of life but
different opinions about the distributional impacts of these gains.
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Disparities in economic and social development across and intra-regional
disparities among different segments of the society have been the major planks for
adopting planning process in India since independence. In addition to massive
investments in backward regions, many public policies directed at encouraging private
investments in such regions have been pursued during the first three decades of planned
development. While efforts to reduce regional disparities were not lacking, achievements
were not often commensurate with these efforts. There was Considerable level of
regional disparities at the end of the seventies. It is believed that accelerated economic
growth since the early eighties have increased regional disparities. The ongoing economic
reforms of liberalisation, privatisation and globalisation since 1991 have further widened
the regional disparities. The problem of acute regional imbalances has not yet received
the public attention it deserves.
Rising inequality can create economic and political problems for any country. It
has serious ramifications for the continuation of the reforms process in the Indian
economy. It is very important to understand the impact of reforms on the regional
inequality in the economy. It is interesting to measure the contribution of tertiary sectors
to regional inequality in India and study the impact of the reforms on the services sector
contribution. Average services sector growth rate during the 1980s was 6.6 percent, but
rose sharply to a high 7.6 percent in the 1990s. Agricultural and the industrial growth
rates played significant roles in the 1980s but the services sector was the engine of
growth during the 1990s and 2000s.
Regional imbalance has been one of the major concerns before policy makers and
planners. There had been a huge gap between active and vibrant regions and hinterland in
terms of availability of facilities and this has resulted in unequal levels of economic and
human development. World Bank (2006) in its reported entitled, "India-Inclusive Growth
and Service Delivery: Building of India's Success" has observed sharp differentiation
across states since the early 1990s reflects acceleration of growth in some states and
lagging behind of others. The report further adds that growth failed to pick up in states
such as Bihar, Odisha and U.P. that were initially poor and it means gap between rich and
poor states widened dramatically during the 1990s. The World Bank again in its recent
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release (2008) has mentioned that disparity in income distribution in India has risen
during 1993-2005 which is revealed by the fact that Gini coefficient in this connection
has risen from 0.3152 in 1993-94 to 0.3676 in 2004-05. The Draft of Eleventh Five Year
Plan (2007-2012, Vol. 1) has also admitted that regional disparities have continued to
grow and the benefits of economic growth have been largely confined to the developed
areas.
The nexus between growth and inequality has been debated extensively by the
scholars and empirical investigations. For example, starting with the classical economists,
Ricardo’s two sector model concentrated on growth and distribution within agriculture
and industry addressed the shares of rent and profits and growth process eventually
approaching the steady state zero growth due to diminishing returns in agriculture
(Boyer, 1996). Karl Marx believed that capitalism would result in uneven distribution of
wealth and capitalist have an incentive for pushing wages to the subsistence level (Martin
and Sunley-1998, Dunford and Smith-2000) The neo-classical growth models for closed
economies (Solow 1956,1957,1970) Cass (1965), and Koopmans (1965) state that per
capita growth rate tends to be inversely related to the starting level of output/income per
head and if economies are similar in respect of preferences and technologies, then poor
economies grow faster than rich ones. The neoclassical were more optimistic about
market forces and believed that regional inequality is a passing phase and that market
forces would ensure that the returns to all factors of production would approach their
marginal products (Smith, 1975). Neo-Keynesian growth models says that reduction in
concentration raises the real wage and provides a redistribution of income which leads to
higher utilization and higher rate of economic growth. The link between inequality and
average well being for two sector economy is known as Kuznets hypothesis (1953,1963)
which maintains that given a two sector economy with not too distinct degrees of sectoral
Mean incomes, a perennial shift of population from one sector to another will initially
raise aggregate inequality and it will decrease at later stage. This formulation has been
labelled as the "Inverted U" (1-U) hypothesis or Kuznets cycle (Branlke, 1983). The
Convergence hypothesis asserts that differences in per capita income between any pair of
regions will be transitory so long as the two regions contain identical technologies,
preferences and population growth (Bernard and Durlauf, 1966).
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The bulk of the new theoretical literature on growth and inequality has focused on
models which generate divergence across nations. The long-term progress in raising rural
living standards has been diverse across Indian states (Datt and Ravallion, 1998). Such
disparities are responsible for various states having different capacities for poverty
reduction (Datt and Ravallion 2002). Similarly, Rajarshi Majumdar (2004) in his paper
titled, "Human Development in India : Regional Pattern and Policy Issues" says that
states like Kerala, Maharashtra and Himachal Pradesh put up good performance
regarding social and human development indicators but Kerala has not been able to
convert its social development into economic progress. On the other hand, Gujarat having
low Human Development (HD) ranks, has good ranking in per capita Net State Domestic
Product (PCNSDP).
Services sector is a complex area and very often one finds different definitions of
services. The traditional belief that services cannot be stored and they are consumed as
soon as they are produced is not necessarily true. Due to technology, there is increasing
time gap between consumption and production of services. Some services can be
provided from the same storage repeatedly over a period of time and some services can
be reproduced with fewer input and in a much shorter time span. Common definition of
services sector includes labour services, travel, transport, port & shipping and other
related services, insurance banking and other financial services, construction and
engineering design services, education, tourism, health care and miscellaneous and other
private services.
Development theory says an economy evolves from a predominant agriculture
oriented set-up to a nature of industrial economy satisfying Rostow’s four stages and
Kuznets’s characteristic features of growth. It is believed that as income grow, the
production structure changes due to changes in income elasticity of demand in favour of
manufactured goods. In the case of employment, a shift away from primary sector was
also observed, a part of the transfer of labour from the primary sector went into industry
but on an average the main beneficiary was the service sector." In India, there is rapid
transition from agriculture to services, with industry lagging behind. Inter-sectoral growth
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movements show the declining share of agriculture in total output and rapidly rising share
of service sector.
Some economists hold the view that the net domestic product becomes a
misleading indicator of economic progress if the service sector grows rapidly as a part of
the output of this sector and does not contribute to the growth potential of the economy.
Some economists believe growth of service sector accentuate the existing skewed income
distribution. Some opined that growth of service sector should not cause any alarm and
government should take measures to enhance its role, in view of the need of the economy
to create strong infrastructure and for providing shelter and employment to the people.
The service sector contributes about half of the world GDP. The share of this
sector in the GDP increases, generally, as economy develops. Developed economics are
predominantly service economies and generate over 60 percent of the total employment.
Services assume special importance for developing countries. Services like banking,
communication, transportation etc. provide infrastructure services to the entire economy.
In the low income economies, services contribute more than one third of the GDP. The
share of the services in India's GDP increased from 38.04 percent in 1980-81 to 41
percent in 1990-91 then the share increased to 57.30 percent in 2009-10. Service sector
generally grows faster than the economy as a whole.
The growing importance of services is reflected in the international trade too.
Between 1970-1990 international trade in services increased by an average of 12 percent
annually reaching $ 800 billion by 1990. The value of international trade in services is
one fourth of the value of the trade in goods. Services make up a major chunk of the
invisibles account in the balance of payments.
The service sector in economic theory has evolved from being an unimportant and
a residual sector during Adam Smith's time to being the leading sector for growth in
present day economies. According to the theory of structural transformation an economy
evolves from a primary agrarian one, where the agricultural sector dominates, to an
industrial one, where the manufacturing sector is the largest one, to the services sector
where the services dominates. At the micro level, as income increases, the expenditure on
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food increases less than proportionately and on consumer durable goods more than
proportionately. With further increase in income, the expenditure on goods does not
increase proportionately, but increases more than proportionately on travel, health,
education, communications and financial services.
The structural transformation of an economy takes place mainly along two
dimensions: one is sectoral share in GDP and the second is share of the labour force
engaged in each sector. In developed countries the agricultural sector loses its importance
with a simultaneous growth of the manufacturing sector. Most developed countries and
some industrialized countries have crossed this stage and are now shifting from
manufacturing sector to the services sector.
Developed economies experience an increase in the share of the service sector in
both, the total GDP and the labour force. These countries have witnessed a typical pattern
of structural transformation in which the share of agriculture has declined and the share
of manufacturing has increased, peaked at a certain level and then declined, accompanied
by an increase in the share of the services sector. Employment in manufacturing sector as
a share of total employment has fallen in world's most advanced economies. In India, the
shares of the services sectors in GDP have increased dramatically. The share of the
primary sector in GDP is declining and that of secondary and tertiary are growing. The
tertiary sector has become the highest contributor to GDP displacing the primary sector.
The share of the labour in the primary sector has remained high. The tertiary sector's
share in the workforce has increased over the years but still it has not been able to
displace the primary sector's position. Thus, in terms of employment the primary sector
provides the maximum employment.
The growth of the tertiary sector in India seems to be somewhat out of line with
international experience in recent decades. The newly industrializing countries of AsiaKorea and Taiwan – had their share of employment in manufacturing increasing much
faster than that in the tertiary sector during their initial period of growth in the 1970s.
Only in the 1990s after Taiwan and Korea had development into mature industrialized
economies did their tertiary sector become the dominant provider of employment outside
agriculture. In India share of employment growth in the tertiary sector in the 1970s was
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already 60 percent higher than that in manufacturing. In 1980s and 1990s there was a
virtual stagnation in the share of employment in manufacturing.
The debate about "excess" growth of the service sector (Bhattacharya and Mitra,
1990, 1991) emerged out of this difference in the pattern of development of the
Developed countries and less developed countries. Bhattacharya and Mitra contend that
the service sector is growing at a much faster rate than the commodity output. They call
this 'excess growth'. They opine that this imbalance in growth between the two will lead
to inflation and imports for consumption. According to them, "it appears that income
from service sector is growing many folds more than the demand generated for the
services by the commodity sector". Elsewhere they write, "The growth of service income
would therefore increase only demand for commodities without any effect on supply.
Their argument implies that a balance between the growth of the commodity sector and
the service sectors is necessary. This need not be so. The domestic commodity sector
need not be the only source of demand for the service sector; demand for services can
come from other sources like final consumption, exports increased urbanization and
women entering the workforce. The authors themselves admit that the exogenous source
of demand has far outweighed the commodity sector demand.
Two features of the Indian case stand out in contrast to the developed countries
pattern of structural transformation. In the developed countries the decline in the share of
agricultural GDP resulted in an increase in the share of manufacturing GDP and only
after that did the share of manufacturing decline and the share of services increased. In
India, the share of manufacturing did not increase much. The process of structural change
was characterized by a decline in the share of agriculture GDP and an increase in the
share of GDP from services. The second difference was that in the developed countries
the changing shares of the three sectors in GDP were mirrored in the changing share of
employment/labour force in these three sectors. In India, the changing shares of sectoral
GDP were not mirrored by the changes in the labour force shares.
During the process of growth over the years 1980-81 to 2009-10, the Indian
economy has experienced a change in the production structure with a shift away from
agriculture towards industry and the tertiary sector. The share of agricultural sector in real
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GDP, at 2004-05 prices, declined from 35.69 percent in the 1980-81s to 29.53 percent in
1990-91 and 14.64 percent in 2009-10. The share of industrial sector increased from
25.66 percent to 27.63 percent and 28.27 percent and the share of service sector increased
from 37.65 percent to 42.55 percent and 57.09 percent respectively during the same
period. During the 1950s it was the primary sector that was the dominant sector of the
economy and that accounted for the largest share in GDP. But the whole scenario
changed subsequently, and especially in the 1980s. Services sector output increased at a
rate of 6.63 percent per annum in the period 1980-81 to 1989-90 (i.e. pre-reform period)
compared with 7.71 percent per annum in the period 1990-91 to 2000-2001 (i.e. postreform period) further to 9.15 percent per annum in the period 2001-02 to 2010-11. the
tertiary sector emerged as the major sector of the economy both in terms of growth rates
and share in GDP in the 1990s. Agriculture and manufacturing sectors have experienced
phases of stagnation and growth, the tertiary sector has shown a uniform growth trend
during the period 1980-81 to 2009-10. Growth of services sector has imparted resilience
to the economy.
Keynesian literature believes that income distribution is central to the pace and
pattern of economic growth in terms of its implications for aggregate demand. In the
mainstream economic discourse micro-economic arguments are increasingly brought in
to understand how greater equality is conducive to faster economic growth. Another
stand in the recent years, on the basis of public choice theoretic literature, has shown how
income distribution influences economic growth as it affects voting behaviour in a
democracy (Tanzi and Chu 1998). In this genre of literature, there are several chains of
causation, in which initial level of inequality affects economic outcomes. A fiscal channel
suggests that income inequality creates a demand for redistributive fiscal policy. In a
median voter model, the key measure of inequality is the level of income or wealth of the
median voter relative to the average. The poorer the median voter in relation to the
average, the larger the amount of redistribution that, a majority of voters will favour.
Impoverished fraction of the population creates political pressure for redistributive
policies. It may take different forms in different institutional contexts but it is generally
felt in both democracies and dictatorships. In fact, in order to survive, even dictators
cannot totally ignore popular demands. Redistributive fiscal policies lead to high levels of
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taxation, which negatively affects growth in the long run. Thus, the chain of causation
goes from high initial income inequality to high taxes and from large redistributions to
low growth. An alternative argument is that the rich in every society have the political
and economic resources to escape taxation through capital flight or by tax evasion.
Demand for redistribution policies with a vanishing tax base may lead to large budget
deficits.
A second channel linking inequality and macroeconomic performance goes
through political instability. Income inequality fosters social discontent and unrest. The
associated threats to property rights, policy volatility and government fragility depress
productive investment, promote capital flight and ultimately reduce growth (Alisena
1998: 301)
Empirically, it has been found that in the OECD countries, in the post-war period,
economies with less unequal income distribution have performed better. Similarly,
comparing the performance of the East Asian economies with those of Latin America,
Jeffery Sachs contended, "....high income inequality....(In Latin America) contributes to
intense political pressure for macro-economic policies to raise income of lower income
groups, which in turn contributes to bad policy choices and weak economic performance"
(Sachs 1989 :9).
In most states, the share of the service sector now exceeds 50 percent of SDP.
During the last three decades, the service sector has grown on an average by 8 to 9
percent per annum in many states, notably Gujarat, Haryana, Kerala, Maharashtra, Tamil
Nadu and West Bengal with the exception of Gujarat, the service sector now accounts for
almost half of SDP in all rich states. Transition of the India from an agrarian economy to
an economy dominated by service sector, thereby bypassing the stage of a developed
industrial economy, is increasing economic inequalities. The economic performance of
different regions in India has been extremely different over the past three decades which
has resulted in higher level of regional disparities.
The growth of the services sector in the Indian economy has its own limitation.
The economic and social position of the worker in the services sector will steadily go
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down in the long run since real income cannot be higher than productivity for any
extended length of time. The workers in the service sector will use all their strength and
put all efforts to get higher wages, than their economic contribution justifies.
To some extent, increases in regional inequality are driven by factors that are
necessary for accelerated growth-in particular, the more efficient allocation of private
capital, foreign as well as domestic. State government policies can make a lot of
difference: government in poorer states such as Madhya Pradesh and Rajasthan have
made strides in improving, on average, the relative standard of living of their constitution.
Hence we cannot say that liberalization necessarily leave certain states behind. At the sub
state level, some states are facing greater disparities emerging within their boundaries.
One might guess that intra-state labour mobility is greater than across states, so that this
problem may be more self-correcting than inter-state disparities. On the other hand, the
problem may be mobility across rural and urban areas, and across social boundaries. The
evidence is consistent with the point of view that the reforms have had a greater positive
impact in urban areas, leaving rural areas to await meaningful agricultural reform
(removing distortions on pricing and distribution, and improving infrastructure). Intrastate disparities also put the focus on effective state government policies, including
building the fiscal and institutional capacity of nascent local governments to deliver local
public goods and services. The central government may also draw some policy lessons
from the empirical evidence on regional inequality as it shows very clearly that intergovernmental transfers cannot remove such inequalities. Streamlining and improving the
centre-state transfer system can only help isolate any inter-state disparities that are likely
to cause political tensions, and make clear the redistributive effort that is politically
necessary. In this respect, it is important to recognize that implicit financial transfers by
the central government, through its control of the financial system, have been important
and have often favoured higher income states (Rao Shand and Kalirajan 1999). Reducing
the role of pervasive government in the financial sector can be an important component to
making the inter-governmental transfer system at all levels (centre-state, state-local and
centre-local) more efficient, if inter-regional inequalities are to be clearly addressed by
government policy. If we look at India's record with respect to inequality in the postreform period then we find it is not bad, with respect to potential problems of growing
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regional disparities. Economic reform has actually done better in many ways than any
commentators have expected. Clearly we do have policy improvements that can help us
further in managing inequalities, but they are much more in the spirit of further reform
than of any backpedalling.
As economy progresses the share of the primary sector decreases and that of the
secondary sector increases. After industrialization gathers momentum, the secondary
sector becomes the dominant sector in the economy. It is only at a later stage when the
economy attains a fairly high level of development typically when it becomes a middle
income country that the tertiary sector overtakes the secondary sector. This is the general
pattern of development seem, especially in East Asia. If we take the example of China,
the secondary sector now contributes almost 50% of GDP. In India, at aggregate level,
and also at the regional level, the tertiary sector became the largest sector even before the
secondary sector can dominate the economy.
The pattern of structural changes which we noticed in India deviated from the
development pattern of other western economies. According to Kuznets western
economies experienced a stage by stage shift from primary to secondary and from
secondary to tertiary in their advanced stage of development but in India this trend is not
visible. The expansion of the secondary sector is not enough in India so as to absorb the
increase in labour force. The unskilled and uneducated rural masses have continued to
struggle in the primary sector and those who have been forced out of the primary sector
by economic, social and political factors have joined urban slum sectors. The pattern of
growth underlines the link between growing poverty and unemployment and the
inadequate growth of manufacturing and building activities in the economy.
The development of infrastructure industries to meet the growing demand in the
economy increases the role of public services in the economy. The effect is a result of
growing mobility due to expanding trade, tourism urbanization etc. They are mainly
responsible for the growth of the services sector. The above factors are internal factors
which resulted in expansion of the tertiary sector. External development such as
expansion of knowledge based services, progress of information technology etc. are
responsible for the growth of the tertiary sector in the economy. Sectors like trade, hotels,
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restaurants, storage, communication, finance, insurance real estate and business services
have experienced high trend in growth rate within the services sector. A probable
interpretation of the phenomenon could be upsurge in industries related to services sector
in recent years.
The share of primary sector in national income has decreased from 35.69% in
1980-81 to 14.64% in 2009-10, while the share of services sector has increased from
37.65% in 1980-81 & 57.09% in 2009-10. This has led to inequality in distribution of
income in various sectors. On the one hand in primary sectors 55.9% of labour force is
earning only 14.64% of national income, on the other hands in services sector 25.4% of
labour force earning 57.09% of national income. The annual growth rate of per capita
gross state domestic product (GSDP) in Punjab, Himachal Pradesh and Haryana
increased. In Bihar and U.P. the growth rate declined. Disparity in services sector is one
of the main reasons of inequality in per capita income. Rural urban inequalities in
consumer expenditure have increased. The salaries of public sector employees have
grown at 5% per annum while agricultural wages grew at the rate of 2.5% per annum in
1990s. Intra rural inequalities have not risen while intra urban inequalities have increased.
In fact it is work even when one takes note public consumption (education, health
services etc.) for the poor.
There is an inverse relationship between population growth and income growth
across the states in 1990s. This has a very serious implication not only for growth but
also for employment. The poorer states notably Bihar and U.P. with higher population
growth have performed badly in terms of SDP growth in 1990s. In the post reform era the
inverse relationship between income and population growth has become a serious
problem not only economically out also politically. The rapid growth has been an
inequitable growth as the poor are being by passed and marginalized by structural
changes of modern growth. Widespread poverty creates condition in which the poor have
no access to credit facilities and they are unable to finance their children's education,
health and nutrition which will lead to lower economic productivity and thereby lead
directly and indirectly to a slower growing economy.
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Major problem in India is not only huge difference in per capita income but also
the fact that rate of growth of state income is higher in rich states than poor states.
BIMARU (Bihar, M.P., Rajasthan and U.P.) have per capita income as well as low rate of
growth of state income. Deposit mobilization by commercial bank also reflects the
relative prosperity of some states. In 1998 per capita bank deposits of Maharashtra and
Punjab were Rs. 13,200 and 11962 respectively as against per capita deposits in Assam
and Odisha of only Rs. 2359 and Rs 2506 respectively. Disparity in education sector is
also a major cause of inequality in service sector in major states of India. Educational
disparity is startling between various states and regions of India. While the state of Kerala
is exceptional with 91% literary, the second most literate state is Himachal Pradesh with
77% and least literate state is Bihar with only 48% of citizens educated. The second
distressing aspect is rural –urban disparity in literacy which is 27% favouring urban
areas.
The National Human Development Report-2001 for India reveals considerable
differences in human development among Indian states during 1981-2001. The report
notes that in the early eighties, states like Bihar, U.P., M.P. Rajasthan and Odisha had
HDI close to just half that of Kerala's. The inter-state differences in human poverty are
quite striking and report notes that while there have been improvements in the human
development index and human poverty index during the 1980's, the inter-state disparities
and the relative position of the states has practically remained the same. Facts show that
inter-state disparity as measured and stood at 0.100 in 1991 [Tenth Five Year Plan (200207) Vol. III]. An approach to the 11th Five Year Plan (Planning Commission,
Government of India, 2006) has also acknowledged regional backwardness as an issue of
concern. The differences across states have long been a cause of concern for the planners
of country because we cannot let large parts of the country be trapped in a prison of
discontent, injustice and frustration that will only breed extremism. India is a vast multilingual, multi-cultural country with a federal, democratic polity, a pluralistic society and
large inter-state disparities in levels of development arising out of differences in factor
endowment, infrastructural facilities and literacy education and employment levels.
Regional disparity is now a matter of serious concern for the country. It is well known
that in large economy different regions with different resource bases and endowments
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would have a dissimilar growth path over time. The transition of the country from an
agrarian economy to an economy dominated by services, by passing the stage of a
developed industrial economy is further aggravating economic inequalities in India.
1.1
Objectives of the Study
In this work it has been broadly hypothesized that the liberalization, characterized
by excessive and skewed tertiarization of the economy, has its own consequences in
terms of structure, linkage pattern and macro dynamics of the system. From this point of
view the main objectives of the study are –:
 To analyse the nature, structure and growth of services sector in Indian Economy.
 To delineate the structural change in tertiary sector into its time and space
dimension in India.
 To study the inequality in benefits from reform in major states of India.
 To explore the sustainability of services sector growth in India.
 To explore whether disparities in services sector growth is the cause of regional
disparities.
1.2
Hypothesis
Keeping in view the broad objectives of the study the main hypothesis to be
treated in the field are: Regional disparity has widened significantly during the 1990s whether this is due
to ongoing economic reform is a matter of investigation.
 A proper test of convergence would be required to estimate the impact of initial
levels of income on subsequent periods of growth.
 Economic growth divergence can be obtained through the coefficient of variation
in per capita income across the states over time.
16 | P a g e
1.3 Area of Study
The present study has been undertaken for regional disparities in services sector.
In order to accomplish the task, inter-state disparity in total as well as per capita GSDP
for 16 major Indian states has been taken for the period 1980-1981 to 2009-10. The states
selected for this study are Andhra Pradesh, Assam, Bihar, Gujarat, Haryana, Himachal
Pradesh, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan,
Tamil Nadu, Uttar Pradesh and West Bengal.
Three newly formed states namely
Chattisgarh, Jharkhand and Uttaranchal are taken from the time period 2000-01 to 200910, before that in order to avoid complexities arising out of the re organisation of states
data till 1999-2000 is used which is the last year from which data from the undivided
states is available. Bihar, M.P. and U.P. therefore refers to undivided states uptil 19992000. These states together account for 91 percent of the population of India and the
remaining 9 percent is spread in 12 smaller states and seven union territories including
Delhi (GOI, 2001).
Jammu and Kashmir will be excluded because of political disturbances during
1990's. Pondicherry and six smaller states of north-east will be excluded because they are
too small to reflect general economic behaviour of states in India. The small state of Goa
has been excluded from the analysis because of the significant differences in the structure
of its economies from the rest of the states and therefore its steady state values of income
are likely to be different.
In order to generate data on the aggregate and Sectoral output of the states for
this study are obtained from the central statistical organization (CSO). The GSDP and the
population data series for the states will be revised according to analytical convenience.
1.4
Methodology
Keeping in view the broad objectives of the study the main hypothesis to be
treated in the field are: Regional disparity has widened significantly during the 1990s whether this is due
to ongoing economic reform is a matter of investigation.
17 | P a g e
 A proper test of convergence would be required to estimate the impact of initial
levels of income on subsequent periods of growth.
 Economic growth divergence can be obtained through the coefficient of variation
in per capita income across the states over time.
 The coefficient of variation is one of the most widely used measures of regional
inequality. This measure is standardised and can be used to make comparison
between regions. The weighted coefficient of variation is calculated as follows:
𝐶𝑉𝑤 =
√∑ni(𝑦𝑖 − y ∗ )2 𝑃𝑖
𝑃
𝑦∗
Where
Pi refers to population of the ith state
P refers to population of the country
Yi refers to per capita GSDP,of the ith state
Y* refers to per capita national income and
n refers to number of states.
This measure in better for cross country comparison as the measure of inequality
depends not only on the number of regions but also on the population proportion of the
regions.
1.5
Tentative Chapters
The chapterization of the proposed study is designed as follows:1.
Introduction.
2.
Review of Literature.
3.
Role of Services Sector in Economic Development.
4.
Inter-Linkages between Sectors.
5.
Growth Performance of the States.
18 | P a g e
6.
Regional Disparities in Services Sector in India.
7.
Sustainability of Services Sector in Indian Economy.
8.
Conclusion.
Bibliography.
1.6 Limitations of the Study
Empirical research in services in India is limited. There is a lack of reliable,
timely and easily interpretable data. Trade data on services at a more disaggregated level,
consistent with value added and employment data and comparable across time would go
a long way in promoting research in this field. Constructing and index for services would
also help in assessing services. Such an index can be constructed by first identifying
suitable measures for the output of different services and then attaching appropriate waits
to different services. This will not only help in assessing the growth in different services
but also help in formulating policies viz-a-viz disaggregated services.
At this stage, it is important to note some limitations of SDP data. First, there are
some conceptual problems of measuring GDP at the state level. Secondary, although we
have used CSO compiled SDP data, they are based on the primary data of production and
prices collected by the concerned state statistical department. The CSO only processes
and makes corrections in the methodology of SDP measurement, particularly the value
added component, but it does not change the original data on production and prices. It is
well known that there are a lot of measurement problems at the state level and at the
national level. In some states the quality of primary data is very weak, partly because of
poor statistical systems and partly because of biases in data collection and dissemination.
In many cases, checking for consistency raises doubts about the quality of original data.
For instance, we find a very poor relationship between electricity consumption and
industrial growth in some states. In some other states, SDP growth is at variance with
employment growth in both industry and tertiary sectors. The relationship between input
and output in agriculture is also weak in some states. Thirdly, in some cases unusually
high agricultural growth for a long period of time, more than two decades for instance,
raises doubts about the authenticity of data. It appears that either the law of diminishing
19 | P a g e
marginal returns does not apply or that hidden structural changes have not been
recognized independently. Finally, a large share of employment in India is in "selfemployment" category, there is an inherent difficulty in allocating income accruing from
self-employment when more than one earner from the same household is in an incomeearning activity. Households from different self-employed activities by different
members of the household would be typically pooled together. There is no way of
distinguishing the individual contributions of individual earners. These limitations have
to be borne in mind while measuring growth and disparity at the state level with SDP
data. Hence the substance of the analysis will be based on the study of trends in the
tertiary sector as a whole.
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Chapter-II
REVIEW OF LITERATURE
Several theories and models have been developed, since the beginning of the mid50s, to provide theoretical frameworks for understanding regional economic problems.
Different factors have been identified as determinants of growth in different growth
models. Among the various growth models, the most popular ones are Export base
models,
Neo-classical
models,
Cumulative
causation
(Myrdal-Kaldor)
models,
Econometric models, Input-output-models and Multi sector development planning
models (Richardson 1973)
The usefulness of these models cannot be denied by us but their applicability
cannot be universal. Their applicability will be determined in view of the differences in
resource endowments, economic strategies, capital formation and institutions among
countries, and within a country among different regions and states.
If we take the Indian context, the well known hypothesis of an inverted U-shaped
curve was developed by Hirschman (1958). This hypothesis gets reinstated by the
empirical statements from Kuznets (1957) and Williamson (1965) which state that as an
economy grows, regional disparities diverge at first only to converge later. Kuznets
studies have very well shown us that in several European countries the position of lowincome groups was relatively worse in the early years of industrialization or economic
growth.
Udall lends support to Kuznets and Galenson in suggesting a shift in the demand
for labour in the long run toward tertiary sector. Kuznets says that with economic
development the share of tertiary employment in the labour force increases mainly
because of slow growth of technical progress in services, a high income elasticity of
demand for some of the tertiary activities and increasing urbanization resulting in rise in
the demand for services like transport and distribution. It is viewed that increase in
21 | P a g e
manufacturing activity leads to a rise in tertiary employment as income growth
originating from the expansion of manufacturing activity raises the consumption of
services and also the demand for service inputs-into manufacturing. The growth of
employment in tertiary activities is viewed mainly from two different angles: (a) treating
it primarily as a 'supply push' phenomenon and (b) rationalizing its growth in terms of
'demand induced' hypothesis. Extreme economic under development and high levels of
economic development are associated with greater income inequality. It results in the
possibilities of regional disparities changing with the stage of development.
If we see from a theoretical point of view not much work has been done but the
empirical work conducted in India in the field of regional economics has been
considerable. The major finding is the simple idea that a region with lower per capita
income should grow faster tends to hold for almost all countries experimented so for. The
US, Canada, Japan and Europe clearly show the required 'negative' relationship between
initial 'per capital income' and annual average growth rate over a long period of time. If
one believes in the data set, no one can deny both the visible scatter as well as the
statistical relationship hidden therein the point that within a national boundary, the poorer
region has grown faster than the richer ones, is well taken. A theoretical problem with
the so-called convergence hypothesis is that, on the one hand, such models depend on a
neoclassical specification of the growth process but fail to justify the restricted mobility
of resources which leads to protracted convergence with perfect or extensive resource
mobility. Convergence should have been instantaneous. This problem has been
mentioned in Marjit and Mitra (1996) and Sala-i-Martin. Barro et al analyze a model of
partial mobility of capital and convergence across countries. The main observation of the
empirical research is that there have been evidences of 'convergence' in Europe, USA,
Canada and in Japan this also reinforces the strength of Solow model vis-a-vis
endogenous growth models.
A large percentage of workforce particularly in the developing countries is
located in tertiary activities is attributed to a lack of employment opportunities in
manufacturing and agriculture resulting from technological change, factor market
imperfections and rapid increase in the labour force (Meier 1970). It is often argued that
22 | P a g e
only a small proportion of tertiary employment in the less developed countries is a
function of the income elasticity of demand for services, and majority of it is believed to
be a manifestation of excess supplies of labour relative to demand. Every supply of
labour is taken to create its own employment in this sector by sharing out a given amount
of work (Bhalla 1970). There is no doubt that it appears to be one of the extreme views.
Udall (1976) points out that the demand for service employment is usually taken in the
literature to be relatively elastic (with respect to price).
It is quite evident from the literature that the tertiary sector comprises of highly
heterogeneous jobs which responds differentially to demand and supply factors. The
degree of responsiveness to a particular set of factors also varies depending upon the
nature of jobs within the tertiary sector. Greenfield (1966), for example by dividing the
services into consumer and producer categories, noted that 'production' services grow as
industrial corporations in order to reduce their costs and use the knowledge of the experts
shift some of the tasks previously performed by them, to the producer service firms. The
demand for producer services is expected to rise in a growing economy, with increasing
specialization and capital accumulation. The service organizations in various countries
have become large users of information technology with a shift to a predominantly
service economy, and it has given rise to a large demand for service functions allied to
the operation of the computer hardware. Rising female labour force participation is
expected to have a positive effect on tertiary sector employment. Women workers prefer
tertiary sector employment as this sector is more conducive to the absorption of female
labour entering the job market.
The relationship between workforce participation rate and tertiary sector
employment share has been subjected to much debate and discussion. Fuchs (1980) and
Grubel (1987) argue that with rising female labour force participation the demand for
personal services grows as employed women spend a higher proportion of their income
on services which they themselves would have rendered within the household had they
not been employed. We also see that with certain demographic changes, like population
aging, the purchase of personal services shows an increasing tendency (Silner 1987).
23 | P a g e
All this tends to suggest that different components of the tertiary sector draw their
growth stimuli from different sets of factors, and it would be quite inappropriate to merge
all these components in one single category. Elfring (1989) studied in detail the service
sector employment in seven OECD countries under four board categories –
 The producer services (Activities whose output is purchased mainly by enterprises
and which are intermediate or auxiliary to the production process in other
activities).
 The distributive services (those services which involve the distribution of
commodities, information and transportation of persons)
 The personal services (which cover hotels, bars and restaurants, recreation and
amusements, and domestic services, repair services, barber and beauty services,
laundry and cleaning services and miscellaneous personal services)
 The social services (provided mainly by government, non-profit organizations,
private businesses and professions)
The role of diminishing returns has assumed a central position in this debate. It is
quite natural that some effort would be spent on studying the convergence problem of
states within India. In this array of research studies, a subject, which has dominated the
concerned literature and which cannot be addressed without employing the data set out in
the present data base, relates to inter-state disparities in income growth and to the logical
question as to whether there has occurred inter-regional convergence in income growth
and whether income differentials have narrowed. The studies which have addressed this
question broadly fall under two categories, that is  First, those that have found that there was a marked reduction in income
differentials or that they have seen a noticeable tendency for convergence of long
term SDP growth rates. Examples are Gupta (1973) Dholakia (1994) Cashin and
Sahay (1996) and Sarkar (1996).
 Second, those that have noticed a widening of regional disparities amongst the
states or that have depicted a picture of inter-state divergence. Examples are Nair
(1971), Chaudhury (1974), Majumdar and Kapoor (1980), Bajpai and Sachs
(1996) Rao, Shand and Kalirajan (1999) Dasgupta, Maiti, Mukherjee, Sarkar and
24 | P a g e
Chakrabarti (2000) Sachs, Bajpai and Ramiah (2002) and Nayyar (2008). It must
be clarified here that the results of these studies may have been period specific.
They provide an empirical analysis of conditional convergence across Indian
states and assess the extent to which differences in core social and economic
infrastructure developments gives rise to differences in steady state levels of
output.
Nair’s (1983) pioneering analysis covered 14 major states. He had put together
data on SDP for the years 1950-51, 1955-56, 1960-61 to 1975-76 from different official
and unofficial sources. The study showed that inter-state disparities in per capita NSDP,
as measured by the coefficient of variation (CV) had declined over the period 1950-51 to
1964-65, but increased between 1964-65 and 1976-77. The CV was about 24 per cent in
1950-51, 18 per cent in 1964-65 and 28 percent in 1976-77. Punjab (including Haryana),
Gujarat and West Bengal were the high income states in 1950-51, 1960-65 and 1971-76.
Bihar, Odisha and Uttar Pradesh were at the bottom of the income scale.
Roychoudhury (1993) reported that the CV of per capita in NSDP in current
prices had increased between 1967-68 and 1977-78 but declined between 1977-78 and
1985-86. However, the CV in terms of constant price data showed a persistent increase
during the entire period 1967-68 to 1985-86.
Sarkar (1994) studies the link between regional imbalances and plan outlays. He
discovers a strong link between development (measured in terms of 14 variables
including per capita consumption of electricity, percentage of villages electrified, per
capita expenditure on health effective literacy rates, etc) and the per capita plan outlays
for the different states. He employs principal component analysis to construct a
composite index of development according to which Punjab scores the highest and Bihar
the lowest. The analysis is based on a study of 15 Indian states.
Dholakia (1994) concludes in terms of a study of 20 Indian states over the period
1960-61 to 1989-90 that there are marked tendencies of convergence of long-term
economic growth rates for the states. He identifies 1980-81 to be the year of break in the
25 | P a g e
trend of real incomes of Indian states. Several of the lagging states started growing after
this date while the leaders began to stagnate.
Cashin and Sahay (1996) have taken into account the sectoral composition of the
20 states, and found about 1.5 percent of the gap between real per capita incomes in rich
and poor states was closed each year during 1961-91. That is it would take about 45 years
to close half the gap between any state’s initial per capita income and the states common
long run level of per capita income. However, in an industrial country it would take only
about 35 years. The author also found that over 1961-91 there was a widening of the
dispersion of real per capita Net State Domestic Product (NSDP) for the Indian states.
Marjit and Mitra (1996) raise an interesting theoretical question also in the
presence of factor mobility (as should be the case between Indian states). They wonder
how far the predictions of the convergence hypothesis are valid. With perfect factor
mobility, technologically similar regions must instantaneously achieve equality of per
capita incomes, thus removing any possibility of differential growth rates. Thus, the
absence of imperfect factor mobility is a necessary condition for the convergence theory
to hold. Alternatively, in the presence of factor mobility, differential growth rates across
regions do not imply convergence on account of diminishing returns. Even if a negative
relationship between initial per capita income and the overall growth rate is observed it
may not indicate convergence.
The theoretical literature on regional inequality is based on the assumptions that
may not be equally relevant for all sectors of the economy. Different sectors may
contribute very differently to changes in regional inequality. There are a few studies that
have looked at the contribution of different sectors in the context of changing regional
inequality in India.
Das and Barua (1996) find that for the period from the 1970s to early 1990s
agriculture and services are the crucial sectors that contributed significantly to higher
regional inequality. It may be noted that the literature on regional inequality in India is
completely by the neoclassical growth frame work and accordingly, test for absolute or
conditional convergence of regions over time. They examined several dimensions of
26 | P a g e
regional economic disparities among 23 states/Union territories during the period 197092. Theile’s entropy measure of inequality was computed for economy wide NSDP and
NSDP in different sectors for each of the years 1970 to 1992. It was found that inter-state
inequality increased in almost all sectors.
Krugman and Livas Elizondo (1996) find an increasing regional disparity
throughout the 1980s and a decreasing disparity during the 1990s.
Nagaraj et al (1997) consider the growth performance of Indian states during the
1960-94 period and find evidence of conditional convergence i.e. convergence relative to
state specific steady states, They also assess the contribution of various indicators of
physical, economic and social infrastructures to growth trends. They show that the
coefficient of variation of per capita SDP had tended to fall in the 1960s, attributed
largely to the impact of green revolution, especially in rural India. However, in the
following decades the regional disparity shot up more sharply in the 1970s less markedly
during the 1980s and continuing to grow during the first half of the 1990s.
Ghosh, Marjit and Neogi (1998) used the data for 26 states for 35 years, 1960-61
to 1994-95 to test the hypothesis of absolute convergence and found strong evidence for
divergence. The coefficient of variation of per capita SDP declined mildly during 196162 to 1981-82 from 33.9% to 31.8%. The CV increased steadily after 1981-82 reaching
the value of 43.4% 1993-94. The study used the Consumer Price Index Number for
Agricultural labourers available for 15 states for deflating the nominal net SDP figures to
obtain the real SDP figures. This was an improvement over studies which used some allIndia level deflator.
Rao, Shand and Kalirajan (1999) examining the period 1965-95 found that SDPs
for the 14 major states (excluding Goa and all the special category states) were diverging
(using standard growth regressions for conditional convergence) even when one
controlled for differences in initial conditions. This study focused its attention not only on
the question of convergence but also tried to examine the reasons for the observed
pattern. They found the states to follow divergent growth paths, which they try to explain
in terms of other variables besides the initial level of income. They emphasized the role
27 | P a g e
of private investment flows in explaining this patters of regional inequality. However a
closer look indicates that aggregate inequality did not increase much during the 1980s,
whereas there is a definite rise during the initial years of the 1990s.
They suggest that primary sector was largely responsible for the rise in regional
disparity from mid 1960s until 1990. However, the standard deviation in secondary sector
was stable during the same period, suggesting the stabilizing role of secondary sector in
aggregate inequality. Further, they point out that from the early 1990s to mid 1990s, the
primary sector had a limited role in the growing inequality in the economy, but the
secondary sector played a significant role. As far as the tertiary sector is concerned, there
is no consistent trend in accentuating or offsetting regional divergence.
Dasgupta et al (2000) have studied the period from 1970 to 1995 and concluded
that it is primarily the agricultural sector, and to a certain extent the manufacturing sector,
that had important roles to play in the regional divergence over this period while the
tertiary sector had a stabilizing influence, with regional inequality decreasing in this
sector. He used the per capita SDP data up to 1995-96, and found a clear tendency for the
Indian states to have diverged during the period in question as far as per capita SDP goes.
In terms of sector-wise composition of SDP they diverged a tendency for overall
convergence towards the national average.
Dasgupta compared for each state four estimates of the growth rate over the
period 1970-71 to 1995-96. The arithmetic mean, the geometric mean, the median of
year-to-year growth rates and the trend exponential growth rate. There were considerable
differences among the four estimates, though the ranking of the states in terms of the
alternative estimates was not much different. The arithmetic mean of year-to-year growth
rate and the trend exponential growth rate were found to be close to each other.
Convergence was analysed with respect to aggregate SDP, SDP in agriculture,
manufacturing, service sector and infrastructure sector. Convergence was found only in
the service and in the infrastructure sectors. There was evidence of absolute divergence.
No test of Conditional Convergence was reported.
28 | P a g e
Subramanayan and Rao (2000) examined data on per capita net state domestic
product of major 17 states for the period of 1965-66 to 1996-97 to test the premises that
neo-classical theory of growth predicts convergence of per capita incomes across the
region in the face of equal accessibility to technology and identical saving rate in the
Indian context. They also tried to find out whether agriculture led growth is more
equitable or industry led growth. However, there was no evidence of convergence of per
capita income across Indian states in either period.
Karnik et al (2000) examined the role of institutional and political factors in the
economic performance of Indian states. A Gallup organisation’s opinion poll of CEOs of
about 100 companies, covering the years 1995, 1997 and 1999 constituted the data base
for the analysis. This data set is similar to that employed by Knack and Keefer (1995) in
their cross-country study on institutions and economic performance. The poll asked
respondents to rank 27 Indian states on the basis of their perceptions regarding
infrastructural, institutional and political conditions in the states in order to explain the
attractiveness of these states as investment destinations
N.J. Kurian (2000) attempted a comparative analysis of 15 major states in respect
of a variety of indicators bearing on social and economic development. He classified the
states into two groups, “Forward” group consisting of Andhra Pradesh, Gujarat, Haryana,
Karnataka, Kerala, Maharashtra, Punjab and Tamil Nadu, while the “Backward” group
consists of Assam, Bihar, Madhya Pradesh, Odisha, Rajasthan, Uttar Pradesh and West
Bengal. In some parts of his analysis he compared the indictors for the two groups of
states.
Kurian taking a holistic view of development drew attention to inter-state
disparities by presenting recent data for states on demographic characteristics social
characteristics, magnitude and structure of SDP, poverty ratio, developmental and nondevelopmental revenue expenditures, Eight Plan outlay and its sectoral distribution,
disbursal of financial assistance for investment, indicators of physical infrastructure
development and indicators of financial infrastructure. The paper pointed out that a sharp
dictionary between the forward and backward groups of states had emerged.
29 | P a g e
Mathur (2001) in continuation of his earlier works analysed several facets of
national and regional economic growth since 1950s but with a specific focus on the 1980s
and 1990s.
The study reported a steep acceleration in the coefficient of variation of per capita
incomes in the post-reform period of 1991-96. A tendency towards convergence was
noticed within the group of middle income states, while divergence was evident within
the groups of high and low income states.
Shand and Bhide (2000) analyse the sources of economic growth in 15 major
states over the period 1970-71 to 1995-96. The paper presents useful data in a
comparative frame work for each state on sectoral distribution of NSDP. By way of
analyzing the determinants of growth, the authors present rank correlation coefficient
between NSDP growth rate and alternative measures of size of state life expectancy and
literacy, relative sizes of sectors and banking infrastructure and social expenditures. The
study suggests that agricultural growth has positive impacts on industrial growth and
service sector growth. Agricultural growth is affected positively by land productivity in
agriculture and negatively by the share of agriculture. Reform in the agriculture sector
will yield very beneficial results as growth in this sector is found to have a positive and
significant impact on overall growth. In a related study, Bhide and Shand (2000) bring
out the stark differentiation between “progressive” and “backward” states. Good
performers achieved high growth in all three sectors of agriculture, industry and services.
Poor performers such as Odisha and Assam fared badly in all the three sectors.
Infrastructure appears to be negatively related to the size of public administration.
Aiyar (2001) in a recent study followed the panel data regression approach with
data for a sample of 19 states over the period 1971-96 and used the Least Squares with
Dummy Variable (LSDV) method of estimation. He maintained a clear distraction
between absolute and conditional convergence and estimated the corresponding models.
The dependent variable in each model was the growth rate over a five year period.
Literacy rate (LIT) and private capital investment (PVK) the latter proxied by the
amount of bank credit per capita were the explanatory variables. The assumption was that
30 | P a g e
these variables had a bearing on the state’s growth rate. The results of the study provide
strong evidence for absolute divergence and conditional convergence. Two regressions
were computed. For regression 1 which assumed a common steady state, the estimated
convergence rate was -0.013, implying absolute divergence at the rate of 1.3 per cent
over a five year period. For regression 2 which included LIT and PVK and fixed effects
for the 19 states, the estimated convergence coefficient was very high at 0.199. The
estimated partial elasticity’s with respect to LIT and PVK were statistically significant
with values equal to 0.76 and 0.15 implying strong effects of the conditioning variables
on growth of per capita SDP. The results are interesting. But they are subject to the
serious limitations of the use of high frequency panel data in the context of analysis of
growth determinants highlighted by Pritchett (2000).
Paluzie (2001) predicted a decreasing regional disparity in the first decade and
increasing regional disparities in the next one. Most of these studies cover the period until
mid 1990s although a few recent studies cover the entire 1990s a decade that is useful in
understanding the effect that the reforms has had on regional disparity.
Ahluwalia (2001) did a very influential study in which he used population
weighted Gini coefficients for the 14 major states. It showed a substantial increase from
0.175 in 1991-92 to .233 in 1998-99 in real per capita GSDP. It has a distinctly different
interpretation of the statistical result of its own as well as those of others. In reviewing
the existing studies, Ahluwalia finds that those studies have dealt with long-term trends
and the general conclusion "seems to be that there is no evidence of conditional
convergence". This is, after allowance is made for differences across states in some of the
initial conditions that affect growth rates, such as share of agriculture and some measure
of infrastructure development, the long term time paths of per capita GSDP across states
show convergence.
He argues that conditional convergence is of course quite consistent with
divergence in per capita GSDP over certain periods. Explaining that his paper was not
concerned with convergence in the sense of underlying long-term trends but rather with
the actual behaviour of per capita GSDP in the post-reform period compared with prereform behaviour, Ahluwalia argues that though inter-state inequality as measured by
31 | P a g e
Gini coefficient clearly increased, the common perception that "the rich states got richer
and the poor states go poorer" was misleading.
Punjab and Haryana, which were the richest states, have not only faced slower per
capita GSDP growth in the 1990s than in the 1980s, but have also lagged behind the
national average. Except for Bihar, Uttar Pradesh and Odisha, which have grown even
more slowly, all other states, have narrowed the distance between themselves and Punjab
and Haryana. Apart from Maharashtra and Gujarat, the other two high-income states,
which have experienced the fastest rates of growth in per capita GSDP, Rajasthan and
Madhya Pradesh, have broken ranks from BIMARU states and performed reasonably
well. Ahluwalia finds that the states, which have achieved strong growth in GSDP in the
1990s, are fairly well-distributed regionally : Gujarat and Maharashtra in the west,
Madhya Pradesh and Rajasthan in the North, West Bengal in the East and Tamil Nadu,
Karnataka and Kerala in the South. Ahluwalia also questioned the role of geography like
coastal locations as determining growth performance.
Jeffrey Sachs, et al (2002) have been canvassing the role of geography like coastal
locations as determining growth performance. According to them the most suitable sites
for sustained manufacturing growth in India as in China are along the coast, while hightech services or financial services are much less dependent on coastal locations. Madhya
Pradesh and Rajasthan are both heartland states but have performed reasonably well,
better than Odisha, which is a coastal state. The southern states as a group have done
well, though they are by no means the only ones to achieve acceleration in growth during
the 1990s.
Others argue that the manufacturing sector rather than the agriculture sector is a
more consistent engine of growth and it is likely to play a growing role in a liberalized
economy. Urbanisation is likely to be a key determinant of growth. A 10 percentage point
higher rate of urbanization is associated with 1.3 percentage points a year higher annual
growth.
Sachs et al note that these are major differences across Indian states in the area of
policy reform Maharashtra, Tamil Nadu, Gujarat, Karnataka and Andhra Pradesh have
32 | P a g e
been more reform-oriented, Haryana, Kerala, Odisha, Madhya Pradesh, Punjab,
Rajasthan and West Bengal are somewhat behind in undertaking policy reform. Bihar and
Uttar Pradesh are far behind. With the exception of Andhra Pradesh the reform oriented
states are also the fastest growing states in the post-reform period.
Dholakia,(2002) a veteran in productivity analysis, showed that TFP accounted
for about 22% of GDP growth during the pre-liberalisation period 1960-85 and for about
48% during the liberalization period 1985-2000. The two sets of estimates, which of
course need to be reconciled, highlight the importance of TFP in Indian economic
growth.
Singh and Srinivasan (2002), looking at the period 1990-91 to 1998-99 however
found that the evidence does not permit one to reach very definite conclusions on
convergence or divergence across the (14 major) states. As in other studies, they found
that private investment (measured by per capita bank credit) matters for growth.
They also found that credit-deposit ratios and FDI approvals per capita have
positive impacts on growth. In contrast consistent with the finding of Ahluwalia, the
broad infrastructure index constructed by the Centre for Monitoring the Indian Economy
(CMIE) which includes 13 variables measuring aspect of physical, social and financial
infrastructure, has no significant impact on growth.
Singh and Srinivasan also suggest that the Human Development Index (HDI)
constructed in the NHDR does not show any increase in across state variation (again, this
is for the 14 major states), as measured by the un-weighted standard deviation. Since the
average HDI has risen in the 1990s, the coefficient of variation has fallen. These numbers
are consistent with the conclusion that interstate disparities in well-being have not
worsened in the 1990s.
Nagaraj (2002) examines the effect of economic reform on output, investment and
employment, singled out the distribution of NSDP originating in the manufacturing sector
across states, because economic reforms in India essentially focused on the
manufacturing sector. His analysis shows no statistically significant improvement in the
growth performance of states that have initiated market oriented policies. On the other
33 | P a g e
hand, four states namely, Bihar, Haryana, Punjab and Uttar Pradesh have experienced
statistically significant slowdown in their manufacturing growth rates after the reforms,
thus implying growing inequality in the pattern of manufacturing growth, though this in
turn may "imply a greater efficiency as the production decisions are increasing driven by
private profitability considerations"
Shetty (2003) too observes that regional disparity did increase, whether measured
at 1980-81 prices or 1993-94 prices for the period from 1980-81 to 2000-01
conventionally, scholars working on state domestic product (SDP) data have restricted
their analysis on only major Indian states in view of data limitation associated with
smaller states and union territories in India. Breaking from this trend Shetty calculates the
regional inequality based on all states and union territories of India and finds that the
disparity is much higher compared to that which is based on major states only.
The estimated Gini coefficients from both Ahluwalia and Shetty show that during
the 1980's regional inequality remained stable till about 1986-87 and started increasing
slowly thereafter, but not as fast as in the 1990's.
Sivasubramonian (2004) undertook a very careful analysis of the sources of
growth in the Indian economy during the period 1950-2000 and showed that TFP
accounted for 32 per cent of GDP growth. The relative importance of TFP varied over
time; TFP’s contribution was highest (43%) during 1950-64 and lest (13%) during 196580 and relatively moderate (35%) during 1980-2000.
Bhattacharya and Sakthivel (2004) reveal that disparities in per capita GSDP has
accentuated in the 1990's compared to the 1980's. The coefficient of variation of per
capita GSDP which was 0.22 per cent per annum in the 1980's doubled to 0.43 percent
per annum during the 1990's.
Burgess and Venables (2004) and Foster and Rosenzweig (2004) showed that
agricultural productivity plays a comparatively small role in explaining the inter-state
variations in total, urban and even rural poverty. Further, at the levels of states,
agricultural growth and overall growth are negatively correlated.
34 | P a g e
Rodrik and Subramaniam (2004) observed, based on state level data for the period
1960 to 2000, that there was an upward trend in the average income as well as a wider
spread in the distribution of incomes. They confirmed the wider spread and observed that
the convergence coefficient was positive and insignificant during the 1960s and 1970s for
the subsequent decades, i.e., 1980s and 1990s the coefficient increased and was
statistically significant, suggesting that in the later two decades, states are diverging, at an
annual rate of 1.2%. They further observed 'divergence big time', with peninsular India
growing more rapidly than the hinterland BIMARU states. In the future, they pointed out
that this trend could widen as existing advantages are reinforced by new technologies.
Virmani, Arvind (2008) examined the role of agriculture growth and the growth
in fast moving modern sectors like, registered manufacturing, communication, trade,
hotels and restaurants, on the growth of domestic product of states in India and their
inter-state differences, based on data for the period 1993-94 to 2004-05. He also
investigated, as to what extent do interstate differences in average per capita income of
states explain interstate differences in poverty rates as measured by official poverty data.
He has observed that the cross-state Gini coefficient of per capita GDP (based on 16
states) distribution weighted by population has increased from 0.60 to 0.63 between
1993-94 and 2004-05. However, the degree of variation in SDP growth rates has declined
marginally when the total period is divided into two sub-periods, 1993-94 to 1999-2000
and 2000-01to 2004-05. Importantly, Virmani has observed that the most critical areas
distinguishing
state
growth
performance
have
been
modern
manufacturing,
communication, trade, hotels and restaurants sectors. Analyzing the determinants of
poverty across states, he has observed that the consumption share of bottom 40% of the
population is an important determinant, besides other factors like per capita state GDP,
growth in state per capita GDP from agriculture and per capita state GDP from nonagriculture sectors.
He also observed that the Gini's coefficient of per capita GDP distribution
weighted by population has marginally increased during the 1993-94 to 2004-05 period
although the degree of variation in SDP growth rates has declined when the total period
has been divided into two sub-periods, with a break at 1999-2000.
35 | P a g e
Nayyar (2008) has sought to examine whether or not the disparate levels of
income and development inhabit any tendency in the data to converge to common steadystate paths. While analyzing the data for 16 states for the period 1978-79 to 2002-03, he
has observed that there was no tendency for states to converge to identical states based on
both cross sectional and panel data; but in contrast, there was robust evidence of
conditional convergence. Under the conditional convergence, initially poorer states do
converge faster to their divergent steady states. He has observed increasing dispersion in
per capita real incomes across states over time. States in India are converging to very
different steady states, which may be attributable to increasing inter-state disparities in
levels of private and public investment and an insignificant equalizing impact of centrestate government transfers.
Kalra and Sodsriwiboon (2010) examined the convergence and skill over across
the Indian states using non-stationary panel data techniques. The finding suggested the
existence of divergence over the entire sample period, convergence during sub-periods
corresponding to structural breaks, and club convergence. There was strong evidence of
club convergence among the high and low-income states; the evidence for middle-income
states was mixed Dynamic spill over effects among states were small.
Agarwalla and Pangotra (2011) have tried to examine the trends in disparities
across the regions in India over a period of 26 years (1980 to 2006) by employing panel
data estimation method based on the neo-classical framework. Examining 25 state
economies in India they found convergent trend in regional incomes, conditional upon
growth rates of inputs, and technological growth rate. They have also found that during
the period of 1972 to 2006 the speed of convergence has been faster, because during that
period Indian economy had gone through structural reforms. Further, evidence showed
that incomes of the special category states have experienced convergence at a higher rate.
Bandyopadhyay (2011) used the distribution dynamics method to identify
polarization of incomes across the Indian states and further examined whether there is
any evidence of “neighbouring regions effect”. The author found no evidence of
conditional convergence in investigating for a “neighbours effect” that explains the
36 | P a g e
polarization which suggests that India being a developing country need to develop the
networks across the states to generate spatial interactions.
Mamoni Kalita and Aviral Kumar Tiwari (2012) attempted to test income
convergence of the Indian states. For the analysis, the study utilized 27 Indian states data
for the period 1980-81 to 2007-08 to test for convergence of Indian states GDP in the
panel framework by using a more recently test developed by Ucar and Omay (2009) for
heterogeneous panel unit root test particularly for two reasons. First, it is based on
heterogeneous panel as India states are heterogeneous in nature and culture. Second, it
has advancement in showing the nonlinear nature of convergence if it exists as it is
ignored by existing studies.
The Study found strong evidence against the convergence of the Gross State
Domestic Product (GSDP) among the Indian states. There is no convergence of GSDP of
the Indian states. This implies that Indian states do not follow balanced growth path that
is Indian states are not growing together and there is strong mismatch in the growth path
of GSDP.
37 | P a g e
Chapter-III
ROLE OF SERVICES SECTOR IN
ECONOMIC DEVELOPMENT
India stands out for the size and dynamism of its services sector. The contribution
of services sector to the Indian economy has been manifold. Services sector share in
gross domestic product (GDP) is 55.2 per cent and it is growing by 10 per cent annually,
contributing to about a quarter of total employment. It also accounts for a high share in
foreign direct investment (FDI) inflows and over one-third of total exports. It has
recorded very fast (27.4 per cent) export growth through the first half of 2010-11.
The share of services in India’s GDP at factor cost (at constant prices) increased
rapidly. It increased from 38.04 per cent in 1980-81 to 57.30 per cent in 2009-10. If we
also include construction, then the share increased to 64.83 per cent in 2009-10. The
ratcheting up of the overall growth rate (compound annual growth rate [CAGR]) of the
Indian economy from 5.7 per cent in the 1990s to 8.6 per cent during the period 2004-05
to 2009-10 was to a large measure due to the acceleration of the growth rate (CAGR) in
the services sector from 7.5 per cent in the 1990s to 10.3 per cent in 2004-05 to 2009-10.
The services sector growth was significantly faster than the 6.6 per cent for the combined
agriculture and industry sectors annual output growth during the same period In 2009-10,
services growth was 10.06 per cent and in 2010-11 it was 9.38 per cent. India’s services
GDP growth has been continuously above overall GDP growth.
As Figure 3.1 depicts Agricultures share in GDP has declined, while the share of
industry has shown negligible change and consequently the entire subsequent decline in
agriculture has been picked up by the services sector.
38 | P a g e
Figure 3.1: Average Sectoral Contribution to GDP.
100%
90%
80%
70%
60%
Agriculture
50%
Industry
services
40%
30%
20%
10%
0%
1980s
1990s
2000s
Source: National Accounts Statistics
The primary sector is the dominant employer followed by the services sector but
the share of services has been increasing over the years while that of primary sector has
been decreasing. There was a sharp fall in the share of the primary sector in employment
from 1993-94 to 2004-05. The rise in share of employment of the other two sectors was
almost equally divided between the secondary and tertiary sectors. In 2007-08 compared
to 2004-05, the trend was similar, the fall in employment in primary sector was less at 1.1 per cent with a small commensurate rise in employment in the other two sectors,
which was again almost equally divided between the other two sectors (Table 3.1) Shows
that in 2007-08 the services sector provided employment of one fourth of the total
employment where as secondary sector provided only 18.7 percent of the total
employment. Primary sector still remains the largest employment provider with 55.9
percent of labour force employed by the sector.
39 | P a g e
Table 3.1: Share of Broad Sectors in Employment (UPSS)
Shares in %
Change in Shares in %
Sectors
1993-94
2004-05
2007-08
2004-05
2007-08
2007-08
over
over
over
1993-94
2004-05
1993-94
Primary
64.5
57.0
55.9
-7.5
-1.1
-8.6
Secondary
14.3
18.2
18.7
3.9
0.5
4.4
Tertiary
21.2
24.8
25.4
3.6
0.6
4.2
Source: Economic Survey 2010-11.
Since 1990s there has been an increase in share of services in inward FDI and
outward FDI. Study by Sen (2011) shows that there is a significant positive impact of
FDI on services sector and the service sector growth has in turn a significant growth on
GDP. Financial and non financial services (21%) computer hardware and software (8%)
telecommunications (8%) housing and real state (7%) have attracted largest share of FDI
equity inflows. The share of these four sectors combined namely financial and non
financial services computer hardware and software, telecommunications, housing and
real estate, predominantly consisting of services, in FDI equity inflows in April 2000December 2010 is around 44 percent. If we include construction then the share rises to 51
per cent. The financial and non-financial services sector which falls purely in the services
category is the largest recipient of FDI equity inflows with a 21 per cent share. (RBI
bulletin 2010)
40 | P a g e
Figure 3.2: Annual Growth Rate of GDP and Services Sector GDP
12
10
8
6
Overall GDP
Services GDP
4
2
0
Source: National Income Statistics. Centre for Monitoring Indian Economy
The services sector growth rate has always been aove overall GDP growth rate
since 1981-82 except for the years 1983-84, 1988-89,1990-91,1994-95,1996-97 and
2003-04 when the two converged. Thus for the last 30 years, this sector with with much
growth above overall GDP growth of the economy has been pushing up the growth of the
economy with a great amount of stability (Figure 3.2)
A comparison of the share of services in the gross state domestic product (GSDP)
of different states and union territories (UTs) in 2009-10 shows that the services sector is
the dominant sector in most states of India. States and UTs such as Kerala, Maharashtra,
Bihar, Tamil Nadu, West Bengal, Tripura, Nagaland, Mizoram and Delhi have shares
equal to or above the all-India share. State-wise growth of GSDP is also closely
associated with faster growth of the tertiary sector.
Interestingly, Bihar with 16.6 percent Growth which has the highest overall
growth rate in 2008-09 also has the fastest growth among States in services, in part due to
its rapid progress from a low base (only Goa with 20.1 percent growth rate in services is
higher than that of Bihar, but this is for 2007-08). Even relatively low-income States such
41 | P a g e
as Odisha and Rajasthan which have relatively low overall growth rates have started
piggy-backing on the good performance of their services sectors to climb up the ladder of
progress. Delhi with 81.8 percent tops the list. Other than Chattisgarh (34.8 percent) and
Himachal Pradesh (39.6 percent) services in all other states individually hold a share of
more than 40 percent in the GSDP. The highest growth rates of the services sector are in
the North Eastern states of Arunachal Pradesh (34.9 percent) and Sikkim (30.1 percent).
Other states with higher than national average growth in the sector are Kerala, Tamil
Nadu, Maharashtra and Mizoram. Thus, the services revolution in India seems to be
becoming broader based rather than being concentrated in only a few States.
Some services have been particularly important for this improving performance in
India. Software is one sector in which India has achieved a remarkable global brand
identity. Tourism and travel related services and transport services are also major items in
India’s services. Besides these, the potential and growing services include many
professional services, infrastructure-related services, and financial services.
The contribution to GDP and growth pattern of disaggregated services has shown
a fluctuating pattern. Table no. 3.2 depicts that business services, communication,
banking and hotels and restaurants have shown a consistent rise in growth rate and
contribution to the GDP. There was a decline in the growth rate of insurance, public
administration & defence, legal services, real estate, personal services and storage from
1980s to 1990s. Their contribution to GDP in this time period has not shown a significant
change except for real estate and railways.
Growth of services in India has been broad based, although it has been usually
rapid in modern services like communications, business services and services that are
tradable internationally. Trade in software services and banking services should be given
an impetus as they have a higher contribution to GDP, rising domestic demand, higher
growth rates and boost productivity of the manufacturing sector, thereby leading to a
sectorally linked productivity spiral. Education and health care should be regulated to
meet domestic demand.
42 | P a g e
Table 3.2: Average Annual Growth Rate and GDP Shares of Services Sub-Sectors. (%)
1980s
1990s
2000s
Service Sub –Sector
Growth
GDP
Growth
GDP
Rate
Share
Rate
Share Rate
Share
Trade, Hotels & Restaurants
5.93
11.81
7.48
3.03
8.49
15.9
Transport, Storage & Communication
6.03
6.23
7.49
6.86
12.86
8.94
8.67
8.92
8.05
1.99
9.38
4.92
5.9
13.37
6.46
3.86
6.62
3.79
6.53
40.33
7.28
45.7
8.95
53.6
Financing Insurance, Real Estate &
Business Services
Community, Social and Personal
Services
Total Services
Growth
GDP
Source: Computed from National Income Statistics, Centre for Monitoring Indian
Economy July 2011.
The contribution to GDP and growth pattern of service sub – sectors has shown a
fluctuating pattern. Trade, Hotels and Restaurants and Transport, Storage &
Communication have shown a consistent rise in growth rate. There was a decline in the
growth rate of Financing, Insurance & Real Estate from 1980s to 1990s. The contribution
of Community, Social and Personal Services to GDP in this time period has not shown a
significant change Table 3.2 and Figure 3.3 and Figure 3.4 depicts that the share of
Trade, Hotels & Restaurant in GDP increased from 11.81 percent in 1980s to 13.03
percent in 1990s and further to 15.9 percent in 2000s where as the growth rate increased
from 5.93 percent in 1980s to 7.48 percent in 1990s and further to 8.49 percent in 2000s.
43 | P a g e
The contribution of Transport Storage & Communication to GDP increased from
6.23 percent in 1980s to 6.86 percent in 1990s and rose at 8.94 percent in 2000s and the
growth rate also increased from 6.03 percent in 1980s and 7.49 percent in 1990s and
jumped to 12.86 percent in 2000s. Financing, Insurance, Real Estate and Business
Services contribution to GDP increased consistently from 8.92 percent in 1980s to 11.99
percent in 1990s to 14.92 percent in 2000s whereas the growth rate has decreased from
8.67 percent in 1980s to 8.05 percent in1990s and then rose to 9.38 percent in 2000s.
Community, Social and Personal Services growth rate has increased from 5.9 percent in
1980s to 6.46 percent in 1990s and then rose marginally to 6.62 percent in 2000s.
Whereas, the contribution to GDP remained almost constant.
CSO’s classification of the services sector falls under four broad categories:1. Trade, Hotels, and Restaurants.
2. Transport, Storage, and Communication.
3. Financing, Insurance, Real Estate, and Business Services.
4. Community, Social, and Personal Services.
Among these, Financing, Insurance, Real Estate, and Business Services; and
Trade, Hotels and Restaurants are the largest groups accounting for 17.17 per cent and
16.39 percent respectively of the national GDP in 2009-10. The Community Social and
Personal Services category accounts for a 13.57 per cent share while Transport, Storage,
and Communication accounts for 10.16 percent share of the National GDP in 2009-10.
It becomes important to ensure that the services that contribute relatively more to
growth are placed on a higher productivity trajectory in order to maintain the growthenhancing role of the services sector. On the basis of our analysis the services identified
as a priority are software services, domestic trade (retail/wholesale distributive services),
and financial services. A roadmap of specific policies needs to be drawn for services, not
only to support their growth during periods of crisis, but also for accelerating their
growth rate in the future. These sectors have shown a remarkable resilience despite
relatively less support compared to other sectors.
44 | P a g e
Figure: 3.3: Average Annual Growth Rate of Services Sub-Sectors. (%)
14
12
10
8
6
4
2
0
1980s
1990s
2000s
Figure 3.4: GDP Shares of Services Sub-Sectors. (%)
60
50
40
30
20
10
0
1980s
1990s
2000s
45 | P a g e
The term distributive trade refers to wholesale trade and retail trade that can be
defined as an act of purchase of goods and their disposal by way of sale without any
intermediate physical transformation of goods. This includes commission agents,
commodity brokers and auctioneers, and all other wholesalers who trade on their own
behalf and on the account of others. Retail trade covers units that mainly resell without
transformation new and used goods for personal or household consumption. This sector
covers a wide range of economic activities. Besides the sectors of trade, hotel and
restaurant, transport, storage, communication, real estate and ownership of dwellings,
banking, and public administration, it also covers the sectors of business services and
‘other services’. Business services include business accounting, software development
and data processing, business and management consultancy, advertisement, and other
business services.
The sector ‘other services’ comprises education, research & scientific services,
medical and health services including veterinary services, sanitary services, religious,
community services, recreation and entertainment services, personal services like
domestic, laundry, dyeing and dry cleaning, barbers and beauty shops.
Distributive trade is a very important sector for India with a potential to provide
employment to a large proportion of the population and significantly contribute to the
GDP. In India 98% of trading activities are carried out in the unorganized segment of the
economy. A significant impediment in policy formulation in this sector is that the
statistics of this segment have not been adequately developed and are lacking in quality,
comparability, and timeliness. There is no regular flow of data either from official
sources or through annual surveys. As a result, estimates vary widely about the true size
of retail business in India.
According to Central Statistics Office estimates, total domestic trade, both
wholesale and retail, constituted about 15.1% of India’s GDP in 2006-07, an increase
from 13% of the GDP in 1999-00. In 2004-05 CSO report employment in the retail trade
was around 35.06 million, which constituted about 7.3% of the workforce (459 million).
The corresponding retail employment was about 30.62 million in 1999-00, which means
46 | P a g e
that an additional 4.44 million jobs were added to this sector in the five-year period,
2000-05, showing an annual employment growth of 2.7% per annum.
Wholesale trade, on the other hand, contributed 5.48 million jobs. Indian retail is
dominated by a large number of small retailers consisting of the local kirana shops, which
together make up the so-called “unorganized retail” or traditional retail, with a gradually
rising organized retail sector. The total number of organized retail outlets rose from 3,125
in 2001 (covering an area of 3.3 million sq. ft.) to 27,076 in 2006 (covering an area of 31
million sq. ft.). The impact of the global crisis on the retail/wholesale trade sector has
been low. In 2007-08, the sector’s contribution to GDP growth increased 1.42 percentage
points, compared to an increase of 1.40 percentage points in 2006-07. This was in spite of
a slight decline in the overall contribution of the services sector to GDP growth from 6.9
percentage points in 2006-07 to 6.7 percentage points in 2007-08.
The retail sector in India has steadily growing domestic demand, which is
explained by a rapidly expanding middle class, sustained high economic growth during
the last few years causing a rapid rise in disposable incomes, favourable demographics
placing incomes on younger population with less dependency, and growing urbanization.
Indian retail sales were about US$322 billion in 2006-07 (National Council of Applied
Economic Research, Market Information Survey of Households), which amounted to
about 35% of India’s GDP. India is now the seventh largest retail market in the world.
The Indian retail industry is projected to grow to about US$590 billion by 2011-12 and is
then to grow to over US$1 trillion by 2016-17. This implies there is huge growth
potential in the country’s retail sector.
Trade is an important segment in India’s GDP. The GDP from trade (inclusive of
wholesale and retail in the organized and unorganized sectors) at constant prices
increased from Rs. 4,33,967 crore in 2004-05 to Rs.6,71,396 crore in 2009-10, at a
CAGR of 9.1 per cent. The share of trade in the GDP remained fairly stable at around 15
per cent in the last four years.
The last decade has witnessed acceleration in the growth rate of real GDP. It has
been in the range of 8-9 per cent during the last five years. This fast growth means rising
47 | P a g e
disposable income of the population, in particular that of the middle class. With the
growth in consuming population, the retail business also got a boost.
There are no official estimates of the size of retail trade in the country, though
some estimates have been made by some institutions. On the basis of an NSSO Survey,
the International Council for Research on International Economic Relations (ICRIER)
study of 2008 places employment in the retail trade at 35.06 million, which constitutes
7.3 per cent of the workforce in the country.
On the basis of employment intensity in retail trading, the contribution of the
retail sector in the GDP is estimated in the range of 10 to12 per cent. A large number of
small and decentralized traders dominate the Indian retail scene. One estimate puts their
number at 1.3 crores. The organized corporate sector has started showing interest in the
retail business. Due to fast growth in the GDP and rising disposable income of the
consuming classes, the modern format of retailing (i.e. organized retailing) is attracting
domestic and foreign investment.
Tourism is another major engine of economic growth in most parts of the world
including India. Tourism does not fall under a single heading in the National Accounts
Statistics, so its contribution has to be estimated. In 2007-08, the contribution of tourism
to the country’s GDP, and to total jobs (direct and indirect) in the country was estimated
at 5.92 per cent, and 9.24 per cent respectively. In absolute numbers, the total number of
tourism jobs in the country increased from 38.6 million in 2002-03 to 49.8 million in
2007-08. According to the UN World Tourism Organization, tourism provides 6 per cent
to 7 per cent of the world’s total jobs directly and millions more indirectly through the
multiplier effect in this sector. (Economic Survey 2010-11)
Tourism also plays an important role in the country’s foreign exchange earnings,
as its share in India’s export of services accounted for 13 per cent of the total export of
services in 2009-10. In India, the tourism sector witnessed significant growth in recent
years. During the period 2004 to 2009, the CAGRs of foreign tourist arrivals and foreign
exchange earnings from tourism in rupee terms were 8.1 per cent, and 14.5 per cent
respectively. Foreign tourist arrivals in India, which were at 5.28 million in 2008, fell to
48 | P a g e
5.11 million 2009 due to the global crisis. These arrivals, which registered negative or
low growth rates in the first eleven months of 2009, started recovering from December
2009 with a good growth of 21 per cent.
In the year 2010, the recovery continued with foreign tourist arrivals at 5.58
million registering a growth of 9.3 per cent. The foreign exchange earnings from tourism
in the year 2010 witnessed a growth of 18.1 per cent over the previous year in rupee
terms compared to the decline of 3.3 per cent in 2009. Domestic tourism also plays an
important role in overall tourism development in the country. The number of domestic
tourist visits increased to 650 million in 2009 as compared to 562.98 million in 2008,
witnessing a growth of 15.5 per cent in spite of various adverse factors during this period.
The hotels and restaurants sector is an important sub-component of the tourism sector.
Availability of good quality and affordable hotel rooms plays an important role in
boosting the growth of tourism in the country.
Presently there are 1593 classified hotels with a capacity of 95,087 rooms in the
country. The hotels sector comprises various forms of accommodation, namely star
category hotels, heritage category hotels, timeshare resorts, apartment hotels, guest
houses, and bed and breakfast establishments. The share of the hotels and restaurant
sector in the overall economy increased from 1.46 per cent in 2004-05 to 1.69 per cent in
2007-08, and then decreased to 1.53 per cent and 1.45 percent in 2008-09 and 2009-10
respectively. The CAGR in the GDP contributed by the hotels and restaurants sector was
8.5 per cent in 2004-05 to 2009-10. There was, however, negative growth (-3.41 percent)
in 2008-09 over the year 2007-08, which was due to the adverse global economic
conditions in this year, while in 2009-10, the sector registered a growth of 2.2 per cent.
Several studies have identified the demand-supply gap in hotel rooms in India; some of
them have estimated a gap of 150,000 hotel rooms, of which 100,000 rooms are in the
budget segment. Since the construction of hotels is primarily a private-sector activity and
is capital intensive with a long gestation period, the Government is making efforts to
stimulate investments in this sector and speed up the approval process. Various financial
and fiscal incentives have been announced by the Government for the hospitality sector
including a five-year tax holiday under the Income Tax Act for two, three, and four star
49 | P a g e
category hotels located in all United Nations Educational, Scientific and Cultural
Organization (UNESCO) World Heritage sites (except Mumbai and Delhi) for hotels
starting operations from 1 April 2008 to 31 March 2013. Government also announced a
five-year tax holiday in 2007-08 for two, three, and four star category new hotels and
convention centres coming up between 1 April 2007 and 31 July 2010 in the National
Capital Territory of Delhi and some neighbouring districts of the National Capital
Region. Other incentives for hotels include: Relaxation of external commercial borrowings (ECB) to reduce the liquidity
crunch being faced by the hotel industry for setting up new hotel projects.
 Allowing FDI up to 100 per cent under the automatic route for the hotel and
tourism-related industry.
 Delinking of credit to hotel projects from commercial real estate by the RBI,
thereby enabling hotel projects to avail of credit at relaxed norms and reduced
interest rates.
 Investment-linked deduction under Section 35 AD of the Income Tax Act
announced in the Union Budget 2010-2011 for establishing new hotels of 2- star
category and above all over India.
Government has allowed 100 per cent deduction in respect of the whole or any
expenditure of capital nature. Government also has a voluntary scheme of granting
approval to bonafide tour operators, travel agents, tourist transport operators, and
adventure tour operators who satisfy certain criteria specified in terms of turnover,
infrastructure and manpower. Since infrastructure development holds the key to India’s
sustained growth in the tourism sector, the Government has been making efforts to
develop quality tourism infrastructure at tourist destinations and circuits. Despite these
efforts there is a lot more to be done given the potential of this sector.In fact at 11.5
percent, the share of Travel in India’s exports of commercial services in 2008 is relatively
lower than that of many other exporters of services and half the shares of the U.S.A, E.U.
and China. (Table 3.3)
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Table: 3.3 Composition of Commercial Services Exports of India and Other Major
Services Exporters
(Shares in 2008)
Hong
India
USA
EU
Japan
China
Singapore
1.Transportation
11.0
17.5
23.0
31.9
26.2
34.8
31.4
2.Travel
11.6
26.0
22.2
07.5
27.9
12.7
16.6
3.Other
77.4
56.5
54.8
60.6
45.9
52.5
52.4
Kong
commercial
services
Source: calculated from World Trade organization (WTO) data.
The Indian shipping industry plays an important role in the economic
development of the country, especially in India’s international trade. It also plays an
important role in the energy security of the country, as energy resources, such as coal,
crude oil and natural gas are mainly transported by ship. Approximately 95 percent of of
the country’s trade by volume and 68 percent in terms of value, is being transported by
sea. During crises situations Indian shipping contributes to the uninterrupted supply of
essentials and can serve as second line of defence. Though India has one of the largest
merchant shipping fleets among the developing countries, it was ranked eighteenth in the
world in terms of dead weight tonnage (DWT) as on 1 January 2010. Leaving the ‘flags
of convenience’ countries, India’s share is low at 1.17 percent, while China’s is around
three times higher than India’s. (Table:3.4)
The gross foreign exchange earnings/ savings of Indian ships during 2007-08
were at a record level of Rs. 14,589 crore. Net foreign exchange earnings/ savings of
Indian shipping companies, after accounting for financial costs at 8952 crore were around
61 per cent of gross earnings/ savings.
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Table: 3.4 Share of Merchant Fleets by Flags of Registrations as on 1 January 2010
DWT(in ‘000)
Share (%)
Panama
2,88,758
22.63
2
Liberia
1,42,121
11.14
3
Marshall islands
77,827
6.09
4
Hong Kong
74,513
5.83
5
Greece
67,629
5.30
6
Bahamas
64,109
5.02
7
Singapore
61,660
4.83
8
Malta
56,156
4.40
9
China
45,157
3.54
10
Cyprus
31,305
2.45
11
South Korea
20,819
1.63
12
Norway
20,811
1.63
13
UK and Northern Ireland
20,176
1.58
14
Japan
17,707
1.39
15
Germany
17,50
1.38
16
Italy
17,276
1.35
17
Isle of Man
16,711
1.30
18
India
14,970
1.17
12,76,137
100
Rank
Flag of Registration
1
World Total
Source :UNCTAD, Review of Maritime Transport 2010.
In order to facilitate growth of the Indian shipping industry and make it
competitive at international level, the government has initiated several measures like: Bringing acquisition of all types of ships under open general licence;
 Allowing 100 per cent FDI in the shipping and port sectors cargo support to
Indian shipping lines by providing for centralized shipping arrangements through
the Chartering Wing (Transchart) of the Ministry of Shipping.
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 Introducing tonnage tax system during 2004-05; formulating a Cruise Shipping
Policy of India in June 2008.
 Establishing the Indian Maritime University in November 2008.
According to the National Council of Applied Economic Research (NCAER), a 5
per cent increase in the national shipping tonnage saves or earns an additional 17 per cent
of the freight bill and according to a report by The Energy and Resources Institute
(TERI), a 1 per cent change in Gross Registered Tonnage (GRT) is likely to bring about a
0.0068 per cent change in the GDP.
While India’s overseas seaborne trade has been growing substantially over the
years from 224.62 million tonnes in 1999-2000 to 598.70 million tonnes in 2008-09 with
a CAGR of 10.57 per cent during 2004-05 to 2008-09, there is a sharp decline in the
share of Indian ships in the carriage of India’s overseas trade from about 40 per cent in
the late 1980s to 9.5 per cent in 2008-09 with a 5.7 per cent share in India’s export trade
and 12 per cent share in India’s import trade. Given the relatively low participation of
Indian ships in India’s export trade and given the fact that Indian ships are ageing, with
the average age of the Indian fleet increasing from 15 years in 1999 to 18.3 years in 2009,
there is urgent need to increase the shipping fleet for a country of India’s size. This will
lead not only to higher growth of the economy but also higher foreign exchange earnings/
savings and higher employment.
Ports play a vital role in the overall economic development of the country. India
has a long coastline with 13 major ports and around 200 non-major ports. Around 72 per
cent of the total cargo handled by volume was through India’s major ports and the rest
through non-major ports till 2008-09 but after the development of private ports the share
of major ports fell to 67 per cent during 2009-10. Despite the recessionary trend and
decline in exports, during the years 2008-09 and 2009-10, traffic at major ports attained a
growth of 2.2 per cent and 5.74 per cent respectively over the previous year. Recent
developments in the port services sector include the finalization of a model concession
agreement for awarding projects on Public Private Partnership (PPP) basis in 2008 and
introduction of web-based port community systems.
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The ranking of ports in the world in 2008 places Singapore, followed by Shanghai
and Rotterdam at the top, with Madras and the Jawaharlal Nehru Port Trust (JNPT) in the
70th and 71st positions in terms of total cargo volume. In terms of container traffic also,
the JNPT ranks 25th. The average turnaround time in major Indian ports was 4.38 days in
the year 2009-10 and was relatively higher in some ports like Paradip, Kolkata, Vizag,
and Kandla, while average output per ship berth- day was 10,168 tonnes with more than
double the average in the JNPT and around one- fifth the average in Kolkata port. With
the average turnaround time in India already relatively high by international standards,
the turnaround time of Singapore being less than a day. A cause for worry is rise in
average turnaround time and average pre-berthing time, and also fall in average output
per ship-berth-day in 2009-10. (Source: Ministry of Shipping website)
A lot of attention needs to be paid to our port sector. A holistic approach is
needed for improving the existing infrastructure and services at ports through
modernization of the systems using latest technology. The infrastructure facilities at
major ports for handling of crude oil needs to be strengthened through a facilitative
policy on single-point moorings. Upgrading of the facilities at existing ports with regard
to cargo handling, stevedoring, pilot age services, bunker services, and warehousing
facilities need to be done. Trans-shipment of Indian cargo needs to be handled at Indian
ports through concerted measures. This would include increasing the draft available at
Indian ports, rationalization of port dues and providing differential levels of tariff for
different sizes of vessels or for different cargoes so as to attract mother ships to berth at
Indian ports. The many port charges in India need to be reduced as they are higher than in
many other countries due to inefficiency of ports and inclusion of unrelated costs like
pension and other contributions to labour in port services.
The warehousing services sector plays an important role in the economy of the
country. Warehousing services are an important cog both in inbound logistics, as raw
materials, parts, stores have to be stocked, inventory control maintained, materials which
do not meet specifications returned to suppliers, as well as outbound logistics as the
goods produced have to be stored in different geographical locations before shipping/
dispatch as per demand/ order inflows.
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In India, the most important component of warehousing is storage for agroproduce, food grains, fertilizers, manure, etc. Other components include industrial
warehousing for industrial goods, import cargo, and excisable cargo; Inland Container
Depots (ICDs)/ Container Freight Stations (CFSs) for facilitating import/export trade; and
special warehouses for cold and temperature controlled storage. The warehousing sector
also provides ancillary services like handling, transportation, pest control, farmer
extension schemes, dedicated warehousing at doorsteps, consultancy, and project
execution.
Indian Government has established Central Warehousing Corporation (CWC)
with the objective of providing scientific storage facilities for agricultural implements
and produce and other notified commodities. 17 State Warehousing Corporations (SWCs)
were also set up under the Warehousing Corporations Act 1962 for the same objective.
The CWC and the respective State Governments are equal shareholders of these SWCs.
The commercial outreach with social objectives has resulted in the CWC operating a
large warehousing network across the country. As on 31 December 2010, the CWC was
operating 476 warehouses, with a total storage capacity of 102.24 lakh MTs and an
average utilization of 85 per cent. It made an entry into operation of public bonded
warehouses in the late 1970s, when the Central Board of Excise and Customs,
acknowledging the expertise of the CWC in the field of storage and warehousing,
identified it as a custodian for dutiable goods. The CWC has also diversified its business
into CFSs/ICDs and also started Container Rail Transportation from Loni (UP) to
Jawaharlal Nehru Port. The expansion of the overall capacity of the CWC has been slow
as it is cost intensive. The profits generated are being ploughed back to construct
additional warehouses thereby strengthening the warehousing infrastructure throughout
the country. At the level of the state, the 17 SWCs meet the storage requirements and
complement the work of the CWC. As on 31 October 2010, these SWCs were operating a
network of 1585 warehouses with an aggregate storage capacity of 214.41 lakh MT.
Major policy initiatives taken recently by the Government include construction of
godowns under the seven-years guarantee scheme of the Government of India, most of
them being managed by the CWC or SWCs; permission of up to 100 per cent FDI in the
construction of warehousing infrastructure; and construction of warehouses under the
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Grameen Bhandaran Yojana of NABARD and the Rastriya Krishi Vikas Yojana. In the
year 2007-08, the Government enacted the Warehousing (Development & Regulation)
Act 2007 to make the warehouse receipt fully negotiable. Recently the Government took
another major initiative for construction of godowns under its Private Enterpreneurs
Godown (PEG) scheme. The CWC has constructed 0.9 lakh MT capacity godowns
during the year 2009-10 and has planned to construct additional capacity to the tune of
1.77 lakh MT during the year 2010-11.
The opening of the telecom sector in India has not only led to rapid growth but
also helped a great deal towards maximization of consumer benefits as tariffs have been
falling across the board as a result of increasing competition, with the telecom service
price index falling from 100 in 2004-05 to 85.08 in 2007-08. The telecom sector has
grown from a level of 22.8 million telephone subscribers in 1999 to 54.6 million in 2003,
and further to 764.77 million at the end of November 2010. Wireless telephone
connections have contributed to this growth as the number of wireless connections rose
from 3.57 million in March 2001 to 729.58 million by the end of November 2010. Teledensity, which was 2.32 per cent, increased to 64.34 per cent in November 2010.
However, there is a wide gap between rural tele-density (30.18 per cent in November
2010) and urban tele-density (143.95 per cent in November 2010). It shows that the
market still has large untapped potential. The Internet, which is another growing mode of
communication, is a worldwide system of computer networks. Broadband is often called
‘high- speed’ Internet, because it usually has a high rate of data transmission. Broadband
subscribers grew from 0.18 million in 2005 to 10.71 million as at the end of November
2010. The number of Internet and broadband subscribers is expected to increase to 40
million and 20 million, respectively by 2010 (Source Economic Survey 2010-11).
Introduction of BWA (Broadband Wireless Access) services will enhance the penetration
as well as growth of broadband subscribers. Wi-Max has also been making headway in
penetration of wireless broadband connectivity across all sectors.
The real estate sector includes development of commercial and residential real
estates, with participation and involvement of both Government agencies and private
developers. The GDP from the real estate sector (including ownership of dwellings)
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along with business services witnessed a growth of 7.5 per cent (at constant prices) in the
year 2009-10. In terms of share, it accounted for 9.3 per cent of the GDP in the year
2009-10. Fiscal incentives for the housing sector provided in successive budgets together
with liberal investment and credit policies and reforms brought the housing and real
estate sector to the centre stage of the Indian economy. Policy measures include
permission for FDI in townships, housing, built-up infrastructure, and construction
development projects, including SEZs, under the automatic route, which has attracted
foreign investors into this sector.
A joint study by Price Waterhouse Coopers (PWC) and Urban Land Institute of
India (ULI) has cited India as one of the emerging markets for real estate sector in the
Asia Pacific Region. The study classifies India as semi-transparent market in the Asia
Pacific Region, and ranks it 41st on a global transparency scoring scale. It places Mumbai
(ranked 3rd), New Delhi (5th), and Bangalore (10th) among the top 10 prospective cities
for real estate investment for the year 2011. Mumbai and New Delhi in that order capture
the top two places in terms of city development prospects for the year 2011. In this
emerging services sector, while short term worries like hardening interest rates need to be
addressed, there is also need for some fundamental reforms like tackling the high stamp
duty issue which makes even honest citizens deal in black money and problems related to
foreclosure of loans and the Urban Land Ceiling Regulations Act (ULCRA).
Indian software services comprising ITES and IT-BPO services have shown
remarkable resilience to the global economic crisis. Software services grossed US$47
billion in 2008–09, growing by 17% from the previous year. This sector is a major
contributor to the growth of the economy and has a multiplier effect in terms of export
earnings, investments, employment, and overall economic growth. The total employment
in the IT services is estimated to have reached 2.0 million in 2007-08 against 1.63 million
in 2006-07, a growth of 22.7%. This represents a net addition of 375,000 professionals to
the industry employee base in 2007-08. The indirect employment attributed to the sector
is estimated to be about 8.0 million in 2007-08. This translates to the creation of about
10.0 million job opportunities, which can be attributed to the growth of this sector.
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The global economic crisis led to a fall in the growth of software services, but the
growth in domestic demand cushioned the adverse effects. Domestic demand for both IT
and IT-BPO services grew much faster than their exports. A double-digit growth in
exports of IT-BPO (29.8%) in a time of crisis reflects the competitive edge of Indian ITBPO services over other suppliers. At present, India has over 400 delivery centres across
52 countries. This strategy of geographical diversification along with productivity growth
and operational efficiency has provided a strong footing to the sector.
India has gained a brand identity as a knowledge economy due to its IT and ITES
sector. The IT and ITES industry has four major components: IT services.
 Business Process Outsourcing (BPO).
 Engineering Services and R&D.
 Software Products.
The growth in the services sector in India has been led by the IT-ITES sector
which has become a growth engine for the economy, contributing substantially to
increases in the GDP, employment, and exports. Its contribution to India’s GDP
increased from 4.1 per cent in 2004-05 to 6.1 per cent in 2009-10 and an estimated 6.4
per cent in 2010-11. The industry has also helped expand tertiary education significantly.
The top seven States that account for about 90 per cent of this sector’s exports have
started six to seven times more colleges than other States.
The Indian IT-ITES industry has registered robust growth since 2004-05.
According to NASSCOM, the year 2010-11 is characterized by broad-based growth
across mature and emerging verticals. The overall Indian IT-ITES revenue has grown to
US $ 63.7 billion in 2009-10 and an estimated US $ 76.1 billion in 2010-11, translating
into a CAGR of 22.5 per cent from 2004-05 to 2010-11. The industry grew by an
estimated 19.5 percent in 2010-11 compared to the moderate growth of 6.2 per cent in
2009-10.
Exports dominate the IT-ITES industry, and constitute about 77 per cent of total
industry revenue. Total IT-ITES exports have grown from US$ 17.7 billion in 2004-05 to
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US $ 49.7 billion in 2009-10 and an estimated US $ 58.9 billion in 2010-11 registering a
CAGR of 22.2 per cent from 2004-05 to 2010-11. Though the IT-ITES sector is export
driven, the domestic market is also significant with a revenue growth of US $ 14 billion
in 2009-10 and estimated revenue of US $ 17.2 billion in 2010- 11. This sector has also
led to employment generation. Direct employment in the IT services and BPO/ITES
segment was 2.3 million in 2009-10 and is estimated to reach nearly 2.5 million by the
end of financial year 2010-11. Indirect employment of over 8.3 million job opportunities
is also expected to be generated due to the growth of this sector in 2010-11. These jobs
have been generated in diverse fields such as commercial and residential real estate,
retail, hospitality, transportation, and security.
India continues to be the dominant player in the global outsourcing sector.
However, its future will depend on how the challenges related to competitiveness are
tackled. These include increasing competition, rising costs, talent shortfall, infrastructure
constraints, increasing risk perception, protectionism in key markets, and deteriorating
business environment.
The share of banking and insurance services of the total services output has
remained consistently around 10%, while its share in GDP growth has increased steadily
over time. In 2008, India had 88 scheduled commercial banks, 27 public sector banks, 31
private banks and 38 foreign banks. The banks have a combined network of over 53,000
branches and 17,000 automated teller machines (ATMs). According to a report by ICRA
Limited, a rating agency, the public sector banks hold over 75% of the total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5%,
respectively.
Accounting, auditing, and book-keeping services are part of ‘business services’.
The accounting profession in India is highly developed with the potential to become
internationally more competitive. As per the WTO data, in the $33.76 billion other
business services exports by India in 2008, the share of legal, accounting, management,
and public relations services was 17.4 per cent and in the $21.06 billion imports of other
business services by India, their share was 17.9 per cent.
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Indian accounting firms are increasingly getting integrated, and are providing
associated services such as management consultancy, corporate finance, and advisory
services, in addition to their core business of accounting, auditing, and tax services. The
Indian accounting sector mainly comprises small and medium enterprises (SMEs),
matching the existing economic structure of India. The number of chartered accountancy
firms with five or more partners is about 2000 out of more than 13000 firms. The cost
and management of accounting profession in India has attained great maturity with the
quality of professional cost and management accounting services being on par with the
best in the world. Scientific use of management accounting tools on a wider scale can
bring about higher cost efficiency in operations and take the Indian accounting industry
to greater heights.
As per the Department of Science and Technology estimates, the national
investment on R&D activities was Rs. 37,777.9 crore in 2007-08. India, with a R&D
share of 0.8 per cent in the GDP in 2007-08, is ahead of other developing countries like
Mexico, Malaysia and Chile. India lags behind countries like South Korea 3.5 per cent,
Russia 1.1 per cent, China 1.5 per cent, and Brazil 1per cent. A cross-country comparison
of expenditure on R&D by sectors shows the dominance of the business enterprises
sector in other countries.
In India Government sector continues to account for a leading share, an important
development has been the rising share of the business enterprises sector from 19 per cent
in 2002 to almost 30 per cent in 2007. As per estimates in 2009-10, the sectors which
attracted largest R&D expenditures include pharmaceuticals, electrical, non electrical
machinery, transport equipment, electronics and plastics. R&D intensity (R&D as per
cent of sales) for the pharmaceuticals sector was much higher than other sectors.
There is huge potential for R & D services, particularly in healthcare, biotech and
electronics. However, there are issues related to intellectual property rights (IPRs) in the
sector. India has amended the IPR laws in the past two decades and its laws are fully
compliant with WTO regulations. The Government has taken many measures to
encourage R&D like enhancing the weighted deduction on expenditure incurred on inhouse R&D from 150 per cent to 200 per cent for the manufacturing business and from
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125 per cent to 175 per cent for payments made to national laboratories, research
associations, colleges, universities and other institutions for scientific research. Also
allowing a 125 per cent weighted deduction for approved associations engaged in
research in social sciences or statistical research, besides exemptions in the income from
approved research associations in the Budget 2010-11.
The legal systems in India is rooted in British common law, thus making Indian
lawyers competent, without much additional training, to undertake standard legal work
such as vetting of contracts, patent registrations, or reviewing of documents. India has an
estimated 600,000 legal practitioners and is next only to USA in terms of numbers.
According to industry sources, Indian commercial law practice generates Rs. 600 crore to
Rs. 650 crore per annum in revenues. The service providers are individual lawyers and
small or family-based firms. In India, the practice of law is governed by the Advocates
Act of 1961. India has over 750 law colleges and about 30,000 lawyers graduating every
year. The Bar Council of India, which lays down the standards of professional conduct
and etiquette, standards for legal education has been constituted under the Advocates Act
1961. There are also State Bar Councils that enrol advocates and enforce discipline.
Government has constituted the National Legal Services Authority (NLSA), under the
Legal Services Authorities Act 1987 to monitor and evaluate implementation of legal aid
programmes and lay down policies and principles for making legal services available
under the Act. India is ranked 41st, with a score of 4.8, in terms of judicial independence,
according to the Global Competitiveness Report (2010-11) of the World Economic
Forum. Over the years, the legal system in India has undergone changes. This has
enabled transformation of Indian lawyers into global service providers. Since
liberalization Indian lawyers have been gaining dynamic experience in handling cases in
fields such as banking, telecom, insurance, power, civil aviation, and transportation,
which were earlier largely under the purview of the public sector. In addition, they have
acquired experience in areas related to taxation, mergers and acquisitions, joint ventures,
IPRs, FDI, and special economic zones.
India’s prominence in the Legal Process Off- shoring (LPO) segment is being
widely acknowledged in the global market. Potential exists for India to tap a significant
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share of world LPO business. India holds significant advantage in various parameters that
work in favour of driving the LPO industry towards India. Off-shoring legal work to
India saves about 80 per cent of the cost that may be incurred in a developed country like
USA. It is estimated that the cost of employing a fresh law graduate in the USA would be
US $150,000 per annum as compared to US $ 15,000 per annum in India.
Consultancy is essentially a knowledge based profession with an underlying
developmental role spanning a wide range of sectors. Consultancy services play an
important role in the development of the economy and consultancy exports enhance the
visibility of Indian technical expertise abroad and boost the external sector in multiple
ways including foreign exchange revenues, promotion of export of technology and
merchandise (especially capital goods and raw materials) and training of personnel while
contributing significantly to national development in the host country.
Revenues of Indian consulting industry are estimated at US$ 4.41 billion in 2007.
Though the consulting profession contributed only 0.44 per cent to the GDP in 2007,
growth rates of the industry have been extremely promising over the last few years with a
CAGR of about 73.68 per cent between 2002 and 2007. The consultancy services market
can be broadly categorized into management consultancy and engineering consultancy.
Some of the commonly provided services across both fields of consultancy include
detailed project reports, impact studies, evaluation/ assessment studies, advisory services,
design and detailed engineering.
Consulting services in India are being provided by a host of entities, the major
categories being individual consultants, consulting firms, R&D organizations, academic
institutes, and professional bodies. Consulting firms are the dominant players (64 per
cent) followed by individual consultants (22 per cent), R & D organizations (10 per cent),
academic institutes (3 percent), and professional bodies (1 per cent). The client sectors to
which consulting services are provided include agriculture, banking and financial
services, chemicals, education, energy, entertainment, environment, governance, public
administration and policy, hospitality, infrastructure, manufacturing, real estate, retail,
information technology, telecommunications, transport and utilities.
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The Indian management consultancy industry has shown high growth partly due
to the low base from which it picked up. Growth in management consultancy exports was
also high with exports amounting to US$7.3 billion in the year 2006-07.
The Indian engineering consultancy market is experiencing a boom, with many
large-scale development projects driving its growth. It is a more developed market as
compared to the management consultancy market. Although it is still relatively small in
revenue size as compared to the global engineering consultancy market standing at US$
2.91 billion in the year 2006-07. The Indian engineering consultancy industry has shown
a steady growth over the last few years. India has emerged as one of the fastest growing
consultancy markets worldwide. This is largely attributable to increased investment
activities due to liberalization of FDI restrictions, entry of many new players into the
Indian market, high growth in most key sectors and India being an emerging economy
and a low- cost sourcing destination.
The construction industry in India is an important indicator of development as it
creates investment opportunities across various related sectors. The construction industry
has contributed an estimated Rs 3,84,282 crore (at constant prices) to national GDP in
2010-11 (a share of around 8 per cent). The industry is fragmented, with a handful of
major companies involved in construction activities across all segments; medium sized
companies specializing in niche activities; and small and medium contractors who
actually work on subcontract basis and carry out the work in the field. The sector is
labour intensive and provides employment to more than 35 million people. Creation of
physical assets is an important outcome of construction activity. Before liberalization the
sector was dependent on Government spending on infrastructure. The sector was given
industry status in the year 2000. Since then, there are more initiatives by the Government
to undertake projects on PPP basis. These initiatives have resulted in more private
ownership of build-operate transfer (BOT), build-operate-own-transfer (BOOT), and
build-operate-lease-transfer (BOLT) projects.
FDI is allowed up to 100 per cent under the automatic route in townships,
housing, built-up infrastructure, and construction of development projects (which include
housing, commercial premises, educational institutions, and recreational facilities). The
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construction sector has major linkages with the building materials industry since they
account for sizeable share of the construction costs (approximately 40 per cent to 50 per
cent). The construction component accounts for more than half of the investment required
for setting up critical infrastructure like power projects, ports, railways, roads, and
bridges. The sector therefore is critical for enhancing the productive capacity of the
overall economy. Construction sector is all set to become one of the growth engines of
the Indian economy in the foreseeable future. Construction services have been brought
under the ambit of services tax since the year 2004.
However, certain infrastructure projects like dams, roads, bridges, railways, and
airports and projects awarded by Government/ local bodies are exempt from services tax.
The existing VAT Act provides for deduction of subcontractor turnover based on
documentary evidence.
The outlook for the services sector which had slightly dimmed due to the fallout
of the sub- prime crisis in the US and the global financial crisis has once again
brightened. Recent business performance indicators of different service firms in different
sub-sectors also support this healthy prognosis. Even during the crisis year, annual
services growth was around the 10 per cent mark, which it has maintained since 2005-06.
This is in contrast to the overall GDP growth which fell to 6.8 per cent in 2008-09 from
9.3 per cent in 2007-08. Thus the resilience of the services sector has greatly contributed
to the resilience of the economy.
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Chapter-IV
INTER LINKAGES BETWEEN
SECTORS
Structural changes have been historically associated with the economic
development in the national economies. It has been defined as a process combining
economic growth with changing share of different sectors in the national product and
labour force. Structural changes observed historically have followed a sequence of shift
from agriculture to industry and then to services. An underdeveloped economy is
characterised by a predominant share of agriculture; with development the share of
industry increases and that of agriculture declines, and subsequently after reaching a
reasonably high level of development, the services sector increases in importance,
becoming a major component of the economy. This pattern holds across historically and
with countries with different levels of development. Structural shifts and changing
sectoral shares are found to hold both for the national product and the work-force.
Structural changes do not only characterise economic development, they are also
necessary for sustaining economic growth. The neoclassical view that sectoral
composition is a relatively unimportant by-product of growth has been convincingly
questioned by structural economists like Kuznets, who have empirically demonstrated
that growth is brought about by changes in sectoral composition. This is so both for the
reasons of demand and supply.
Emphasis laid on different factors by different economists has varied a lot, the
broad line of reasoning advanced by pioneers like Fisher and Clark and followed with
some elaborations and modifications by later analysts has been as follows: Income elasticity of demand for agricultural products is low.
 Income elasticity for industrial, particularly manufacturing goods is high.
 Income elasticity for services is still higher.
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As a result, the demand for agricultural products relatively declines and that for
industrial goods increases with rising levels of income, and after reaching a reasonably
high level of income, demand for services increases sharply. Accordingly the shares of
different sectors in the national product get determined by the changes in the pattern of
demand. On the supply side, agriculture being mainly dependent on a fixed factor of
production, namely land, faces a limit on its growth and is subject to early operation of
the law of diminishing returns. Industry, especially manufacturing offers large scope for
use of capital and technology, which could be multiplied almost without limit with
human effort. Labour supply could constrain expansion of industry, but it is possible to
overcome it by introducing labour-saving technological changes. It also applies to
services, where application of technologies seems to offer much larger scope, as shown
by the experience of past few decades. In the case of services, there are also additional
reasons why their share in national product increases with industrial development. These
arise both out of the technological developments and economic and institutional
arrangements compelled by them (Kuznets, 1966).
Technological developments facilitate and economically necessitate geographical
concentration and large scale based production. It leads to larger requirements of
transport, storage and communication. In a rural economy, most of the food is produced
close to the consumers but with increasingly larger population getting located in urban
areas result in requirements of transport and trade increase even for making available
food to the consumers. Increasing demand for housing in urban areas leads not only to the
expansion of construction activity but also leads to demand for housing related services.
These are generally not common in villages. Higher income levels not only give rise to
higher demand for personal services such as education, health and recreation but also
technology based modes of meeting them which leads to demand for other services. For
example, when the conventional means of recreation such as folk songs and dances or
fairs and festivals give way to radio and television, then a whole host of new services of
repair, maintenance, production, broadcast, telecast and distributive arrangements for
programmes develop. Larger scale and increasing complexity of economic organisations
in different sectors of activity give rise to the need of regulation, requiring expansion in
government machinery. There is a disagreement among economists regarding the primary
66 | P a g e
force behind structural changes that accompany economic development. Classical
economists like Fisher and Clark, basing their arguments on Engel’s Law thought that
shift from agriculture to industry takes place as a result of low income elasticity of
demand for agricultural products and high income elasticity of demand for manufactured
goods. They seem to lay different emphasis on the demand and supply side factors in
respect of shift from manufacturing to services. Fisher (1939, 1946) emphasised
saturation of demand for manufactured goods and high income elasticity of demand for
services. Basing his argument on the so-called “hierarchy of needs”, Clark agreed that
final demand will increasingly shift to services, but shift of labour force takes place,
according to him, due to high productivity of manufactured goods and low productivity
of services. Kuznets (1971) saw income elasticity of demand as the primary reason for
changes in economic structure, but recognised that other factors, technological and
institutional, also play an important role in accelerating these changes.
Primarily emphasising on the supply side, Kaldor (1966, 1967) considered
manufacturing as the engine of growth. Agriculture being subject to diminishing returns
is not able to sustain an increasing level of production and income therefore
manufacturing without such limitations on expansion of production is the key to
sustained economic growth. The key role of manufacturing in growth is explained by
Kaldor through his three famous laws, emphasising strong causal relation between
growth of manufacturing and growth of GDP, between growth of manufacturing output
and growth of productivity in manufacturing and between rate of growth of
manufacturing and growth of productivity in other sectors. Growth of services, according
to him, was induced both by requirements of expanding industrial sector and rising levels
of income.
The ‘demand side’ explanation based on differences in income elasticity of
demand is questioned by economists like Bamoul (1967, 2001) particularly in regard with
the shift of labour force to services. According to this line of argument, employment shift
does not result from changing final demand, but from differential productivity growth.
Victor Fuchs (1968) in his classical study of the emergence of domination of services
sector in the United States corroborates the view propounded by Bamoul and concludes
67 | P a g e
that shift to services is largely a result of productivity differentials; demand shifts play
only a minor role in this process. He finds that income elasticity of demand for services is
only slightly higher (1.07) than for goods (0.93) and that for non-food goods is similar to
that of services.
Differences in emphasis placed on the ‘demand side’ and ‘supply side’
explanations of structural shifts, by different economists notwithstanding, the truth may
lie somewhere in between. This view is best presented by Kuznets (1971), who sees the
driving force for changes in sectoral composition of output in differences in income
elasticity of demand for products of different sectors, but caused by differential growth of
productivity in different sectors. Changing structure of demand with increasing per capita
income levels induces changes in production structure, but at the same time, changes in
technological conditions of production, increasing scale and concentration of production
and institutional arrangements necessitated by changes in location of production and
population, also have significant influence on the pattern of these changes. Further, the
response of changing consumption demand pattern on production structure in the national
economies will vary depending on the close or open character and trading possibilities of
a country. In a closed economy the domestic production structure will need to respond to
the changing demand pattern as much as its production capacity permits. In an open
economy demand for certain commodities can be met by imports while the national
production structure will primarily be determined by comparative advantage. Structural
changes in the national output inevitably accompany and bring about economic growth
irrespective of the primary and secondary factors causing them. Structural changes in
output are also expected to be accompanied by similar changes in employment.
Thus, with the decline in the share of agriculture in national product, a decline in
the share of agriculture in employment can be expected resulting in a transfer of labour
from agriculture to industry. In fact, such a transfer is seen by economists like Arthur
Lewis (Lewis, 1955) as a source of capital accumulation and a relatively costless process
of economic growth. Agriculture carried out mainly as a subsistence activity in an
underdeveloped economy has a large surplus of labour with insignificant contribution to
production but claiming its full share in consumption. Use of this labour in growing
68 | P a g e
industrial sector leads to net addition to the national output without significantly
increasing the cost of labour consisting of subsistence wage to the economy. Several
assumptions involved in this approach have doubtful validity, a subject, which has been
widely debated in development literature and need not be repeated here. It emphatically
makes the point that economic development of an underdeveloped country not only
involves but requires shift of labour from agriculture to industry. Magnitude of such shift
will depend on the rate at which industrial development takes place and the technology
and the labour absorbing capacity of the developing industry. There is a general
agreement among economists that the employment share of services will rise in the next
phase, after the first phase of shift to industry. It is not clear as to when and at what level
of economic development and per capita income it will take place. The reasons why this
shift will take place are also seen differently by different economists. Earlier economists
like Fisher and Clark seem to take it for granted that it happens due to changing demand
pattern. Fisher argued that services are “luxuries” with an income elasticity of demand
greater than unity and therefore at higher income levels an increasing share of
expenditure is absorbed by them and it leads to high share of services in output and
labour force. Clarke argued that demand for manufactured goods saturates, settling at
around 20 to 25 per cent and with continuing decline in the demand for agricultural
products the demand for services rises. While Fisher assumed that increase in the share of
services in final demand directly and proportionately translates into its share in
employment.
Later economists like Bamoul and Fuchs see a rise in the share of services in
employment primarily in productivity differentials between industry and services sectors
demand shifts playing a minor role. Bamoul, assuming that share of goods and services in
real output is constant over time and across countries and basing his conclusion on a
study of six developed countries (Canada, Germany, France, Japan, UK and US), over the
period 1948-1995 finds that a higher and rising share of service sector in employment in
high income countries is explained by low productivity of this sector. Victor Fuchs in his
study of 48 US States over the period (1929-1965) also sees the lagging productivity
growth of the services sector as the reason for its rising employment share. Increase in the
share of services in employment and also to some extent in the national product is also
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explained in what is seen as change in the “inter-industry division of labour”. Industry
has increased the use of services as intermediate inputs and many of the processes and
activities of a ‘service’ nature which were carried out by manufacturing firms as part of
their activity and accounted for as part of manufacturing and industry are increasingly
outsourced to enterprises included in the ‘service’ category. The differences in income
elasticity of demand still appear to be the driving force behind changes in product
structure of an economy in an ‘agriculture-industry-services’ sequence. The supply side
factors such as technology, scale and territorial concentration of production and changes
in inter-industry division of labour leading to relocation of activities from one sector to
another now provide increasingly significant explanation of structural shifts in output in
recent years. Increasing share of labour force in services has been attributed by most
economists to the low productivity in services as compared to manufacturing.
A common pattern of today’s developed countries has no doubt followed
historical pattern of economic development. Share of agriculture has seen a steady
decline in total output. Industry registered an increase for a considerably long period, and
then has shown a decline. Share of services has steadily increased all through, but the rate
of increase seems to have accelerated in the latter half of the twentieth century. The
period characterised by the emerging dominance of services in the economies of
developed countries is also seen as signalling the dawn of a ‘post-industrial society’
(Clark, 1984). The timing of the different phases of structural changes and speed of such
changes has of course been different among different countries. In the ‘pre-modern’ era,
which according to Kuznet’s assessment ended at different points of time during the
nineteenth century in different countries (e.g. before1800 in Great Britain, 1835 in
France, 1861 in Italy, 1870 in USA, 1878 in Japan, etc.), agriculture accounted for a half
to two-thirds of the total output. It seems to have taken about 75 to 100 years for this
share to decline to about one-fourth in the case of most European countries, though
similar shift was achieved more swiftly in North America and Japan, the relative
latecomers in modern economic development. In spite of differences in time of entering
the era of modern development and in the speed of transformation, the share of
agriculture had declined to less than 15 per cent in most of these countries by middle of
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the twentieth century and has seen a further continuous decline since then, reducing it to
less than 5 per cent in all of them, by the end of the twentieth century.
At the beginning of the ‘modern’ development industry held a share of around
25% in most of the developed countries of today. It grew steadily and reached the peak of
about one-half by 1950’s in all these countries irrespective of the period when they
entered the industrialisation phase. All the developed countries have seen a decline in the
share of industry in their output since the 1950’s. The changes in the share of industry
have been observed to be hump-shaped (Kuznets, 1966, World Bank, 1988 and
Echevarria, 1997). It is interesting to note that in most of the countries industry has the
same share in output in the beginning of the twenty-first century as it had in the
beginning of their journey to ‘modern’ economic growth. Thus in 2002, the share of
industry in national output in the United Kingdom was 26 per cent, comparable to 23 per
cent in 1801, in France 25 per cent same as in 1841, in Germany 23 per cent compared to
24 per cent in 1841, in Italy 29 per cent comparable to 22 per cent in 1901 and in USA 23
per cent comparable to 20 per cent in 1841 (Kuznets, 1966 and World Bank, 1983 and
2004).
The services sector has experienced a secular increase in its share right through
the period of modern economic growth in all countries except for an initial decline in a
few countries namely Great Britain, France and Germany. The share crossed the 50 per
cent mark by 1901 in Great Britain, saw a decline till about mid-1950 and crossed 50 per
cent again by 1960. Most other countries, France, Germany, Italy and Japan had crossed
this mark for the first time by 1960. The United States had hit a 50 per cent mark for
services in its GDP earlier. There has been a continuous and a relatively fast increase in
the share of services since the 1960’s and now it stands at 68 to 75 per cent in all the
countries. The highest being 75 percent in the case of the United States, followed by the
United Kingdom at 73 per cent, France at 72 per cent in 2002. It is somewhat lower at 68
per cent in Japan. The above description of changes in sectoral shares during the period
of modern economic growth in today’s developed countries tends to suggest a common
or a ‘normal’ pattern of development. This has been seriously questioned by a group of
economists led by Chenery (Chenery and Syrquin, 1975), who have argued that for any
71 | P a g e
meaningful discussion on the subject countries need to be divided into different groups
by size–large, small with primary exports and small with industrial exports. Empirical
work using categories of very large, large and small categories, however, shows no
difference in average performance among the nations in the three groups, except that the
share of industry begins to rise at a lower per capita income levels in the large than in the
small countries (Perkins and Syrquin, 1989). It is interesting to observe that by the end of
the twentieth century most developed countries showed a remarkably similar structure of
their economies irrespective of the period when different phases of structural changes
occurred. Thus agriculture contributes less than 5 per cent in GDP, industry 25 to 30 per
cent and services around 70 per cent in all of them.
Table: 4.1 Output and Employment Shares in Selected Developed Countries (2002)
Countries
Shares in output (%)
Agriculture
Industry
Shares in employment (%)
Service
Agriculture
Industry
Service
U.K.
1
26
73
1
25
74
U.S.
2
23
75
2
24
74
France
2
22
76
3
25
72
Japan
1
31
68
5
31
64
Germany
1
30
69
3
33
64
Italy
3
29
69
5
32
63
Australia
4
26
69
5
21
74
Sources: Kuznets, 1966 and World Bank 1983 & 2004
It is also equally interesting to note in general that the structure of employment is
found to be remarkably similar as that of the national product. Figures of shares of
different sectors in GDP and employment in 2002, as given in Table: 4.1 1 reveal a
striking symmetry between the two variables. In all the seven developed countries
selected agriculture contributes less than 5 per cent of GDP as well as of employment.
Industry share in GDP is in the range of 22 and 30 per cent and its share in employment
varying between 21 and 33 per cent follows similar pattern as of GDP among the
countries. Services account between 68 and 75 per cent of GDP and 63 and 74 per cent in
employment in all the countries. What is equally, if not more striking is that structural
72 | P a g e
shifts in output have generally been faithfully accompanied by similar shifts in
employment. So that when output share of agriculture in the United Kingdom declined
from 32 per cent 1801 to 22 per cent in 1841 and further to 6 per cent in 1901, its
employment share also declined correspondingly to 35, 23 and 9 per cent. When output
share of industry rose from 23 per cent in 1801 to 40 per cent in 1901 and 56 per cent in
1955 and declined to 42 per cent by 1980, the corresponding change in its employment
share were from 29 per cent to 54 per cent, 57 per cent and 38 per cent. Product and
employment shares of different sectors in other countries have not behaved as ‘perfectly’
as their counterparts in the United Kingdom but their long-term movements have also not
shown a degree of asymmetry that could result in significant widening of inter-sectoral
productivity and income differentials.
It can be summarised the main interesting features of the historical pattern of
changes in the economic structure that accompanied economic development of today’s
developed countries over the past two centuries are first, all countries irrespective of the
time they embarked upon the ‘modern’ economic growth had a similar sequence of
changes in their economic structure starting with a predominance of agriculture to
industry and subsequently in favour of services. Second, while a decline in the share of
agriculture and increase in the share of services took place continuously over a period of
about two centuries but the share of industry changed in a hump-based fashion, initially
increasing continuously for a period of about one and half or one century and then
experiencing a decline over the last fifty years. Irrespective of the time when
industrialisation started, ‘deindustrialisation’ in terms of a decline in the share of industry
is observed to have started around the middle of the twentieth century in all countries.
Third, the structure of the economies of most developed countries looks like a replica of
each other, each of them having a miniscule share of agriculture, industry claiming about
one-fourth and services around seventy per cent of the national product. Fourth, changes
in the structure of labour force generally accompanied those in product structure, thus the
share of each sector in employment moving in line with the output share of that sector.
What is most interesting to note is the fact that today the employment structure of most
developed countries is strikingly similar to their product structure reflecting a high degree
of inter sectoral equality in productivity and income level.
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Indian economy revealed similar structural characteristics in 1950 as most
developed countries of today showed at the time they embarked upon the road to
industrialisation. With about 60 per cent of GDP accounted for by agriculture, industry
contributing about 13 and services about 27 per cent the Indian economy in 1950 was
structurally comparable to the economy of the Great Britain in late eighteenth century
and of Germany at the beginning of the nineteenth century and of the United States and
Italy of mid-nineteenth century and of Japan in 1900. Similar comparisons hold in respect
of the share of labour force in different sectors. Agriculture accounted for about threefourths, industry for about 11 and services 16 per cent of total employment in 1950 in
India. Economic development in India over a period of half a century seems to have
followed the same pattern of structural changes that the developed economies of today
underwent over a period ranging between 100 to 150 years. The share of agriculture in
GDP declined from around 60 per cent in 1950-51 to 14.64 per cent in 2009-10. Industry
increased from 13 to 28.27 per cent and of services from 28 to 57.09 per cent. This
pattern of shifts has been continuous throughout the period of over half a century, but the
speed of the shift has been faster since 1990-91. The first forty years saw a decline in the
share of agriculture from 59 per cent to 35 per cent, the next 20 years from 35 to 15 per
cent. Share of services increased from 28 to 40 per cent in the first 40 years and from 40
to 57 per cent in the next 20 years. Share of industry has grown slowly but has stagnated
since 1990-91. The most striking feature of the structural change in the Indian economy
in recent decades has been the pre-eminence of services sector as the major contributor to
growth raising its share rather sharply in the national output. Industry particularly
manufacturing which has been observed historically to be the main contributor of growth
has at least in the initial period of economic development played only a minor role in
India’s economic growth. Questions have been raised whether India is already at a level
of development to sustain such a change in the sources and pattern of economic growth.
In other words while developed countries entered the phase of predominance of services
in their economies after going through a phase of industrialisation, and industry having
attained a share of 50 per cent in the economy. India is on the way to become a postindustrial ‘service economy’ without industrialising.
74 | P a g e
Generally two propositions have been advanced to explain such a swift and a
historical transition of an economy directly from an agricultural to a service economy
bypassing industrial development. It is argued that technological advancements over the
past few decades have led to increasing demand for services even at a relatively low level
of per capita income and also the distinction between products and services has become
rather blurred. Development of communication technologies and movements of people
across countries have produced demonstration effect creating similar pattern of demand
in developing countries as in the developed countries leading to larger demand for and
consequently production of services (Panchamukhi, Nambiar and Mehta, 1986). As a
result, elasticity of demand for services has become greater than unity even in countries
with relatively low per capita income levels (Sabolo, 1975) leading to a rise in the
contribution of services in national product. Second, the classical model of structural
changes with economic development was based on the experience of nations with more
or less autarkic regimes with little international trade, a situation in which domestic
product structure of each country has to reflect its demand pattern. With increasing
openness of economies and trade playing significant role in them changes in demand
pattern can be met through trade and countries can have a product pattern very different
from the pattern of consumption demand largely based on comparative advantage.
These propositions imply a new path of development different from the one
observed to have operated in the countries which went through development process
earlier and if true should hold not only in India but also in other countries with similar
levels and structures of economic development. A comparison with economies of
developing countries, particularly in South, South East and East Asia will be in this
regard. Countries chosen for this comparison here are China, Indonesia, Malaysia,
Pakistan, India, Philippines, Thailand and Republic of Korea (Table 4.2). Share of the
services sector has increased in all these countries since 1960.
In Indonesia, it increased from 25 per cent in 1960 to 38 per cent in 2002, in
Malaysia it declined during 1960 to 1980 but raised from 36 per cent in 1980 to 44 per
cent in 2002. Pakistan saw an increase from 38 to 54 per cent and the Philippines from 46
to 53 per cent between 1960 and 2002. In Thailand it increased from 41 per cent in 1960
75 | P a g e
to 48 per cent in 2002. For China estimates are available since 1980 when the share of
services sector in GDP stood at 21 per cent and rose to 34 per cent in 2002. In Republic
of Korea, which has a much higher level of per capita income, services expanded from 43
per cent of GDP in 1960 to 55 per cent of GDP in 2002. India registered by far the fastest
increase in the share of services from 30 per cent in 1960 to 51 per cent in 2002.
Table: 4.2 Changes in Sectoral Shares (%) in GDP in Some Asian Countries (1960-2002)
Country
Agriculture
Industry
Services
1960
2002
1960
2002
1960
2002
30 (1980)
15
49
51
21
34
Indonesia
50
18
25
45
25
38
Thailand
40
9
19
43
41
48
Philippines
26
14
28
33
46
53
Malaysia
36
9
18
47
46
44
37
4
20
41
43
55
Pakistan
46
23
16
23
38
54
India
55
24
16
25
29
51
China
Republic
of Korea
Source: Reproduced from T.S. Papola (2005)
Note: For China estimates are available since 1980.
In its share in GDP agriculture, expectedly, registered a decline in all these
countries during 1960-2002, the largest decline being in the case of Thailand from 40 to 9
per cent and of course Korea from 37 per cent to 4 per cent. The share of industry
experienced significant and continuous increase in most of these countries. Thus in
Indonesia it increased from 25 per cent in 1960 to 42 per cent in 1980 and 45 per cent in
76 | P a g e
2002. Corresponding figures for Thailand are 19, 29 and 43 and for Malaysia 18, 41 and
47 per cent.
In India, the increase in the share of industry was much smaller. In 2002 share of
industry in GDP in India was 25 per cent, while it was much higher at 51 per cent in
China, 45 per cent in Indonesia, 43 per cent in Thailand and 47 per cent in Malaysia.
Pakistan is the only country in the group with a lower share of industry than India and the
only one along with the Philippines to have experienced a decline in it during 1980-2002.
Thus the proposition that the growth in the technologically advanced and globalised
world of late twentieth century had to be primarily service-led in which industry plays a
second fiddle does not seem to hold universally. In most developing countries similarly
placed with India and growing at a reasonably high rate industry has played an important
role as services in their growth. Even with a significant rise in the share of services
countries like China, Indonesia and Malaysia have a higher share of industry than of
services and all of them along with Thailand and Korea have over 40 per cent share of
industry in their GDP as compared to about 25 per cent in India. Another significant
difference between the growth pattern of these countries and India is seen in the shift of
labour force with changing sectoral structure of the economy, particularly in the
employment share of services. What is common in most of these countries and India is a
relatively slower shift of labour force from agriculture to non-agricultural sectors.
Thus while the GDP share of agriculture in China declined from 30 per cent in
1980 to 15 per cent in 2002 its employment share declined from 69 to 47. Corresponding
shifts between 1960 and 2002 were: From 50 to 18 per cent in GDP and from 75 to 44
per cent in employment in Indonesia, and from 40 to 9 per cent in GDP and 84 to 46 per
cent in employments in Thailand. Only in Malaysia the decline in labour force in
agriculture has been commensurate with that in GDP which is from 63 to 18 per cent in
the labour force compared to 36 to 9 per cent in GDP. In India, shifts during 1960-2002
have been from 55 per cent to 24 per cent in GDP and from 74 to 60 per cent in labour
force. The shift in labour force in relation to decline in GDP share has been much slower
in India than in other countries. Industry always had a much lower share in labour force
than in GDP in all the countries and the two shares have moved similarly over the period.
77 | P a g e
In Indonesia when GDP share of industry increased from 25 per cent in 1960 to 45 per
cent in 2002 its employment share also increased from 8 to 17, in Thailand corresponding
movements were from 19 to 43 and 4 to 21 per cent and in Malaysia from 18 to 47 and 12
to 32 per cent. In China while GDP share of industry increased from 49 in 1980 to 51 per
cent in 2002 but that of employment increased from 18 to 21 per cent. In India industry
share in GDP increased from 16 to 25 per cent and employment share from 11 to 18 per
cent during 1960-2002. Thus the share of labour force in industry has moved similar to
that of GDP in all countries including India but a similar proportion of labour force
produces much larger share of output in other countries than in India.
Table: 4.3 GDP and Employment Shares in Services (2002)
Country
Share (%)
In GDP
In Employment
China
34
31
Indonesia
38
39
Thailand
48
33
Philippines
53
47
Malaysia
44
50
Republic Of Korea
55
62
Pakistan
54
34
India
51
22
Source: Same as Table 4.2.
If we look at the difference in the growth of employment vis a vis of GDP in
services. In all other countries the share of employment in services has increased more or
less in line with that of GDP but in India employment share has shown much smaller
increase than the GDP share. For example in China the share of services in GDP grew
from 21 in 1980 to 34 per cent in 2002, their share in employment also increased from 13
to 31 per cent. In Thailand, Indonesia, Malaysia, the Philippines and Korea, employment
share increased much faster than the GDP share. In India while the share of services in
GDP increased from 29 per cent in 1960 to 51 per cent in 2002, their share in
employment increased from 15 per cent to 22 percent only. In other words growth of
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services in India has been much less employment-intensive than in other countries. As a
result while in most other countries the share of services in 2002 is similar both in GDP
and employment (China 34 and 31, Indonesia 38 and 39, Malaysia 44 and 50, and Korea
55 and 62 per cent). In India the two percentages are as apart from each other as 51 and
22 (Table 4.3).
There has been a structural change in its sectoral composition of Indian economy
over the years. This structural change and the uneven pattern of sectoral growth and the
recent spurt of service led growth is likely to cause substantial change in the production
and demand linkages among various sectors which in turn could have significant
implication for the overall growth of the economy. At the same time the changes in the
policy environment as a result of the economic reforms process WTO agreement and
growing integration with the world economy in the post reform (Post 1991) period is also
likely to have significant impact on the linkages between different sectors of the
economy. It is widely recognized that the burden of structural adjustment and fiscal
stabilization has been registered in its most virulent form in the agriculture sector. The
post-reform period has witnessed significant decline in capital formation in the
agriculture sector especially in the public sector. The trade liberalization has led to shifts
in cropping patterns towards cash crops such as cotton, oil seed, sugar cane etc. reducing
not only food availability but also increasing the volatility of agricultural incomes (Jha,
2010). As a part of the structural change within the industry sector the importance of
agro-based industries has come down in the post-reform period. The jobless growth of the
organized manufacturing sector and the decline in employment elasticity of the service
sector in the post-reform period has put intense pressure in the farms sector which ends
up with vast numbers of workers moving out of the farm sector into self-employment for
mere subsistence.
The relationship between agriculture and industry has been seen from different
channels. First agriculture supplies food grains to industry to facilitate absorption of
labour in the industry sector. Secondly agriculture supplies the inputs like raw cotton,
jute, tea, coffee etc. needed by the agro-based industries. Thirdly industry supplies
industrial inputs such as fertilizer, pesticides machinery etc. to the agriculture sector.
79 | P a g e
Fourthly agriculture influences the output of industrial consumer goods through demand.
Fifthly agriculture generates surplus of savings which can be mobilized for investment in
industry and other sectors of the economy. Sixthly fluctuations in agricultural production
may affect private corporate investment decisions through the impact of the terms of
trade on profitability. Because of the mutual inter-dependence and symbiotic relationship
between agriculture and industry the contribution of agriculture to industry is well
known, especially in developing countries. Whereas some of these channels emphasize
on the supply side or production side others stress the linkages through the demand side.
The production linkages basically arise from the inter-dependence of the sectors for
meeting the needs of their productive inputs whereas the demand linkage arises from the
interdependence of the sectors for meeting final consumption. Further based on the
direction of interdependence the linkages can also be categorized into two groups. One is
the backward linkage which identifies how a sector depends on others for their input
supplies and the other is the forward linkage which identifies how the sectors distribute
their outputs to the remaining economy. The linkage between agriculture and service
sectors is one-way unlike the two-way interdependence between agriculture and industry
and it is mainly backward linkage. On the other hand industry has two-way linkages with
the service sector and the level of linkage is much higher compared to agriculture sector.
Further service sector has stronger backward linkages compared to forward linkages with
both agriculture and industry (Singh N-2007 and Gordon and Gupta 2004). Service sector
also provides substantial infrastructure support and inputs for the two sectors engaged in
production namely primary and secondary sectors.
It would be useful to review the changes in the sectoral composition of the Gross
Domestic Product (GDP) in terms of share of agriculture, industry and services sector in
the Indian economy. Table 4.4 presents temporal behaviour of the share of economic
activities under primary, secondary and tertiary sectors in the national income for the
period 1951-52 to 2009-10. Over the year, there is a major shift away from the
agriculture towards services sector and industrial sector.
80 | P a g e
Table: 4.4 Sectoral Share of GDP at Factor Cost (At 2004-05 Prices) [in Per cent]
Year
Agriculture
Industry
Services
1951-52
51.45
16.69
29.63
1960-61
47.65
20.09
30.19
1970-71
34.16
23.62
33.26
1980-81
35.69
25.66
37.65
1990-91
29.53
27.63
42.55
2000-01
22.31
27.32
50.37
2009-10
14.64
28.27
57.09
Source: Handbook of Statistics on Indian economy 2010-11.
The share of primary sector has declined from 51.45% in 1951-52 to 14.64% in
2009-10. On the other side during the same period the share of services sector was
consistently increasing and reached 57.09% in 2009-10 from 29.63% in 1951-52. Over
this period, share of industry increased to 28.27% in 2009-10 from 16.69% in 1951-52.
A decade-wise annual trend growth rates in each sector indicates a shift towards
higher growth only from the early eighties contributing to a GDP growth of 5.17%
(Table-4.5).
Table: 4.5 Sector-wise Trend Growth Rate of GDP (At 1999-2000 Prices) {%}
Year
GDP at FC
Agriculture
Industry
Services
1950-51/1959-60
3.68
2.71
5.99
4.40
1960-61/1969-70
3.29
1.51
5.15
4.74
1970-71/1979-80
3.45
1.74
5.07
4.45
1980-81/1989-90
5.17
2.97
6.41
6.35
1990-91/1999-00
6.05
3.34
6.63
7.32
2000-01/2007-08
7.76
3.09
7.46
9.55
Source: Handbook of Statistics on Indian economy 2007-08.
Before that primary sector growth rate was below 2.0% in the sixties and
seventies compared to a higher growth rate of 2.74% during the fifties. Secondary sector
too witnessed a similar picture of high output growth in the fifties (6%) and a
81 | P a g e
comparatively lesser rate 5.15% and 5.07% in the subsequent decades. Further higher
rates of growth achieved in the primary and secondary sectors at 3% and 6.41% during
the eighties remained unchanged in the decade that followed. In the 1990s though GDP
growth was higher than the 1980s it was driven mostly by the services sector. It is the
tertiary sector that has witnessed phenomenal growth from 4.40% in the fifties to 6.35%
in the eighties and 7.32% in the nineties to 9.55% in the 2000s.
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Chapter-V
GROWTH PERFORMANCE OF
THE STATES
The main concern of this chapter is to evaluate economic performance of states in
India over the period 1980-81 to 2009-10. The differential economic performance of the
states is examined by comparing the levels and growth rates of per capita income among
the states during different periods. At a general level, the extent of variation in the Indian
economy can be illustrated by the broad measures of the size of the state economies.
There are 29 state in India with their own democratically elected assemblies. Among
these, 10 states have population of more than 5 crore. There are eight states with
population below half a crore. Table-1 provides the profile of the states in terms of size of
the population and economies. In a view of the level of economic development, it is
apparent from the fact that only seven states have a per capita GSDP more than rupees
50,000 and only one has a per capital GSDP of more than rupees 1,00,000 though this is
relatively smaller states in terms of population and economic activities. Among the state
with a population of more than 5 crore, Bihar and Uttar Pradesh have the lowest per
capita GSDP below rupees 20,000 and Maharashtra and Gujarat which are the
industrially advanced states have the per capita GSDP of more than rupees 50,000.
India is a country of extraordinary diversity, where some states are as large as
many countries in Europe. Regions differ enormously in terms of geography, language,
demography and social norms. Importantly, there are significant differences in levels of
economic development across Indian states. India is a rare example of a developing
country with long-time series data for its constituent states. Although the data has its
limitations, comparability across Indian states is likely to be better than the average crosscountry study (Trivedi 2002).Before analyzing the growth performance at the state level,
we begin with a brief review of the growth performance at the all India level.
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Table: 5.1 Size and Income of India’s states (2009-10) At Constant Prices
(Base Year 2004-05)
S.No.
States
Population
(crore)
GSDP (crore)
Per Capita GDP
(Rupees)
1.
Andhra Pradesh
8.365
347344
40731
2.
Assam
3.004
69143
23279
3.
Bihar
9.685
125875
12683
4.
Jharkhand
3.087
73618
25810
5
Goa
.168
19318
116287
6.
Gujarat
5.791
330671
57267
7.
Haryana
2.485
151563
61045
8.
Himachal Pradesh
.707
35907
50783
9.
Jammu & Kashmir
1.151
36329
30886
10.
Karnataka
5.855
257125
42527
11.
Kerala
3.422
177209
52984
12.
Madhya Pradesh
7.058
168851
22538
13.
Chattisgarh
2.450
71221
31052
14.
Maharashtra
11.049
701550
63497
15.
Manipur
.267
6767
25344
16.
Meghalaya
.258
9814
34118
17.
Orissa
4.04
118201
29716
18.
Punjab
2.851
139056
49453
19.
Rajasthan
6.621
184189
26836
20
Tamil Nadu
6.684
350258
52112
21
Tripura
.356
13061
34433
22
Uttar Pradesh
19.584
365761
18564
23
Uttaranchal
.974
47599
16787
24
West Bengal
8.834
296843
33398
All India
117.00
4507637
38526
Source: Directorate of Economics and statistics of respective state Governments and for
All India – CSO, Government of india, (As on 1-3-2012) & National Income Statistics
Centre for Monitoring Indian Economy (July 2011). Mid Year population from CMIE
2011.
84 | P a g e
Table: 5.2 Annual Growth Rate of the Major Sectors (From 1980-81 to 2009-10) in
percentage.
Years
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Agriculture
14.44
4.86
-0.14
10.75
1.48
0.2
-0.39
-1.73
16.85
0.40
4.28
-2.31
7.06
3.18
4.74
-0.98
10.40
-2.97
7.12
2.41
-0.61
6.46
-8.14
10.84
0.07
5.53
4.13
6.34
-0.27
0.41
Industry
5.24
8.01
1.42
7.88
4.08
4.38
5.76
5.57
9.10
8.30
7.33
0.34
3.22
5.50
9.16
11.29
6.39
4.01
4.15
5.96
6.03
2.61
7.21
7.32
9.81
9.72
12.17
9.67
4.44
9.16
Services
4.62
5.19
7.13
5.72
6.10
7.67
7.59
6.35
6.95
8.88
5.19
4.69
5.69
7.38
5.84
10.11
7.53
8.93
8.28
11.19
5.37
6.88
6.97
8.06
8.13
10.91
10.06
10.27
9.98
10.50
Real GDP at FC
7.17
5.63
2.92
7.85
3.96
4.16
4.31
5.53
10.16
6.13
5.29
1.43
5.36
5.68
6.39
7.29
7.97
4.30
6.68
7.59
4.30
5.52
3.99
8.06
6.97
9.48
9.57
9.32
6.72
8.59
Source: CSO, Government of India
During the three decades period from the early 1950’s t0 80’s, the Indian
economy was witnessing so called “Hindu rate of growth” of 3.5 per cent per annum,
though growth rate had increased to 5.5 per cent in the 1980’s and further to 6 per cent
in1994 -2004. The growth has been by far the best in the 2004-10. While the growth rate
of the Indian economy has been increasing in recent times, one phenomenon which was
85 | P a g e
observed was that the growth performance of the three major sector s of the Indian
economy, namely, agriculture, industry and services has been diverse. The growth in the
agriculture sector has been the most volatile and also the least among the three sectors
most of the times. While the growth in the industrial sector has remained more or less
constant, growth in the services sector has risen sharply. It is very clear from the Figure
5.1.
Figure: 5.1 Annual Growth rates of the Major Sectors.
20
15
10
Agriculture
5
Industry
Services
0
-5
-10
The consequence of the diverse growth rate in the three sectors has resulted in a
structural change in the contribution of the sectors in the total GDP. The share of the
agriculture sector in the overall GDP has declined from 35.69 percent in 1980-81 to 14.45
percent in 2009-10. The share of the industrial sector has increased from 25.66 percent in
1980-81 to 28.27 percent in 2009-10. The share of the services sector has almost doubled
from 37.65 per cent in 1980-81 to 57.09 per cent in 2009-10.
86 | P a g e
Table: 5.3 Share of the Sectors in GDP from 1980-81 to 2009-10.
Year
Agriculture
Industry
Services
1980-81
35.69
25.66
37.65
1981-82
35.35
26.23
37.49
1982-83
34.25
25.85
39.03
1983-84
34.97
25.86
38.25
1984-85
34.17
25.88
39.04
1985-86
32.91
25.97
40.36
1986-87
31.42
26.30
41.62
1987-88
29.86
26.81
42.76
1988-89
31.35
26.56
41.51
1989-90
29.89
27.10
42.58
1990-91
29.53
27.63
42.55
1991-92
28.54
27.33
43.91
1992-93
28.89
26.77
44.05
1993-94
28.24
26.73
44.76
1994-95
27.80
27.42
44.52
1995-96
25.73
28.44
45.63
1996-97
26.19
28.03
45.51
1997-98
24.47
27.95
47.53
1998-99
24.39
27.28
48.24
1999-00
23.72
26.87
49.85
2000-01
22.31
27.32
50.37
2001-02
22.42
26.57
51.02
2002-03
20.13
27.39
52.48
2003-04
20.32
27.20
52.48
2004-05
19.03
27.93
53.05
2005-06
18.27
27.99
53.74
2006-07
17.37
28.65
53.98
2007-08
16.81
28.74
54.45
2008-09
18.77
28.13
56.11
2009-10
14.64
28.27
57.09
Source: CSO, Government of India.
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Figure: 5.2: Share of different Sectors during the period 1980-81 to 2009-10.
100%
90%
80%
70%
60%
50%
Services
40%
Industry
30%
Agriculture
20%
10%
0%
Given this overall picture, now we engage our attention to the situation of the
states. At the state level, the State Domestic Product (SDP) represents output.
Undoubtedly, significant structural changes have taken place in the sectoral composition
of income at states level broadly on the pattern observed at the national level. A steady
fall in the share of agriculture to about 15%, a moderate rise in the share of the industry
to around 28% and a steady rise in the share of services to about 57% in 2009-10.
The share of agriculture in total GSDP had remained at around 45-50% in 198081 in respect of a large number of states such as Assam, Bihar, Himachal Pradesh,
Haryana, Manipur, Madhya Pradesh, Odisha, Punjab, Rajasthan, Sikkim, Tripura and
Uttar Pradesh. The Share of agriculture in Gross Domestic Product at the level of
aggregate economy was around 36% in 1980-81 as per the CSO, Government of India’s
National Accounts Statistics (NAS). Thus high agriculture share was observed both in
agriculturally advanced states with high per Capita income (Punjab and Haryana) and in
many states with low per capita income indicating general backwardness. Punjab is the
only state which has retained the share of agriculture in GSDP at 40% or above until the
end of the 1990s (Table 5.4).
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Table: 5.4 Shares of Agriculture, Industry and Services Sector in total GSDP at constant
prices-state wise.
2000-01
2010-11
1980-81
1990-91
2000-01
2010-11
1980-81
1990-91
2000-01
2010-11
Services
1990-91
Industry
1980-81
Agriculture
Andhra Pradesh
42.85
36.66
28.85
20.69
20.11
22.15
24.65
24.74
37.04
41.19
46.49
54.62
A & N Island
55.32
58.94
29.98
10.17
17.70
8.40
22.84
24.57
26.98
32.66
47.18
65.29
Arunachal Pradesh
44.48
42.56
32.91
29.73
24.51
24.31
22.88
31.41
31.01
33.13
44.21
38.85
Assam
45.43
38.32
33.46
26.34
14.68
16.95
22.37
23.28
39.89
44.73
44.17
50.38
Bihar
45.99
38.23
43.63
26.42
26.36
31.29
10.66
19.77
27.65
30.48
45.71
53.81
Chattisgarh
N.A
N.A
19.39
21.42
N.A.
N.A
41.34
40.41
N.A.
N.A
39.27
38.16
Delhi
4.03
2.99
1.36
.75
25.25
28.91
22.85
14.12
70.72
68.09
75.79
85.12
Goa
19.09
12.10
8.46
4.80
35.05
36.08
41.70
45.14
45.87
51.82
49.84
50.06
Gujarat
37.27
25.24
14.68
13.19
30.42
37.52
41.55
32.36
32.31
37.24
43.77
44.45
Haryana
53.39
44.87
32.23
16.67
19.86
24.42
28.30
29.34
26.77
30.71
39.47
53.99
Himachal Pradesh
46.81
36.88
21.37
19.02
20.11
25.37
37.21
41.04
33.08
37.75
31.42
39.94
Jharkhand
N.A.
N.A
20.17
14.02
N.A.
N.A
51.13
42.00
N.A.
N.A
28.70
43.98
Karnataka
43.13
32.63
29.60
16.97
23.31
26.19
26.04
29.53
33.56
41.18
44.35
53.50
Kerala
36.57
31.18
18.90
10.11
25.29
24.00
21.28
21.04
38.14
44.81
59.82
68.84
Madhya Pradesh
48.90
41.04
26.75
22.35
24.27
28.55
32.95
30.61
26.83
30.40
40.30
47.04
Maharashtra
26.74
21.37
15.60
8.71
36.03
36.31
29.94
29.62
37.23
42.32
54.46
61.67
Manipur
46.23
35.20
30.63
25.16
10.39
13.71
20.19
31.03
43.38
51.09
49.18
43.81
Meghalaya
36.64
24.75
24.82
16.66
19.50
21.81
23.15
29.42
43.86
53.44
52.03
53.92
Nagaland
29.51
27.88
31.72
27.69
16.25
26.43
15.51
16.25
54.24
45.69
52.77
56.08
Odisha
50.19
35.80
28.24
18.08
19.53
26.69
27.26
34.11
30.28
37.51
44.50
47.81
Puducherry
18.61
12.77
6.94
4.56
54.27
57.48
51.43
41.00
27.12
29.75
41.63
54.43
Punjab
49.11
47.06
40.03
23.86
20.03
24.17
23.67
30.79
30.86
28.77
36.30
45.35
Rajasthan
41.62
44.99
25.41
22.59
23.92
22.24
30.62
30.93
34.46
32.77
43.97
46.47
Tamil Nadu
24.33
21.58
17.23
8.27
35.00
35.15
34.13
31.54
40.66
43.27
48.64
60.19
Tripura
52.46
40.43
23.27
24.05
10.07
9.45
27.11
25.41
37.47
50.12
49.63
50.54
Uttar Pradesh
50.38
41.16
35.57
22.99
16.86
22.01
24.14
24.24
32.77
36.82
40.29
52.77
Uttranchal
N.A.
N.A
34.22
11.30
N.A.
N.A
24.17
36.23
N.A.
N.A
41.61
52.44
West Bengal
30.06
29.02
26.14
18.53
31.19
29.45
23.29
19.97
38.75
41.54
50.57
61.50
States /U.T.
Source: CSO, Government of India.
Bihar from a low per capita income group also has agriculture share above 40%
till 1999-00 and the share has declined to near 36% in 2005-06. In respect of many other
states, the share of agriculture sector has declined to the range of 20-30% in 2005-06. The
national average stood at about 22:42 in 2000-01, 18.27% in 2005-06 and 14.64% in
89 | P a g e
2009-10. The relatively low national average could be because; a few states are relatively
advanced industrially or in services sector activities, such as Maharashtra, Gujarat, Tamil
Nadu and Kerala. Gujarat has under gone a large transformation with share of agriculture
in GSDP declining from 38% in 1980-81 to 13% in 2010-11.
The largest transformation has however, been experienced by Karnataka reducing
share of agriculture in its GSDP from 43% to 17% during 1980-81 to 2010-11.Kerala is
the other state where structural transformation has been fast. Slowest transformation is
observed in Punjab and West Bengal. Over the period of almost 30 years the contribution
of non-agricultural sectors has increased from 54 to 66 percent in Punjab. It still derives
about one third of its SDP from agriculture highest in any state. Madhya Pradesh and
Uttar Pradesh are also in the same category. These have agriculture shares below national
average with their shares even being averaged at around 15% or less as depicted in
Table5.4.
A shift from agriculture to services is observed in the case of the most of the
major states. In some cases where industrialization has been rapid declined in agriculture
has been accompanied, to a large extend by an increase in industry. In the case of
Gujarat, the share of agriculture declined from 38 to 16 percent, that is, by 22 percentage
point, it was accompanied by an equal increase in the share of industry and of services by
11 percentage point each. Similarly, a decline in the share of agriculture was
accompanied not only by increase in the share of services but also that of industry to a
significant extent. In Punjab, agriculture has seen a relatively smaller decline in its share,
it is the only state in which it still contributed almost one third (32.6%) of GSDP. The
decline in the share of agriculture has however benefitted industry more than services. On
the other side, in Kerala and Karnataka services have taken the major share of the loss in
the share of agriculture. West Bengal is another alone case with everything happening
rather slowly, agricultural GSDP has declined by 11 percentage point only (against 24
percent at the national level) industry share has significantly declined and that of services
was much less than the national average. Tamil Nadu is yet another exceptional case
where share of agriculture has sharply declined, it is now at the lowest (11 percent) in any
state, share of industry has also significantly declined, and all the gains have gone to
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services sector only. Among smaller states and UTs, a very sharp shift from agriculture to
non agriculture sector is observed in the case of Goa and Puducherry. In the case of Goa
share of agriculture declined from 21 to 4 percent which was mostly compensated by an
increase in the share of services from 40 to 56 percentages, Puduchery saw a decline in
the share of agriculture from 29 to 4 percent, industry increased its share by 45
percentage points from 20 to 65 percent.
In the case of the services sector, the rising share has been experienced in almost
all states. Rapid increases in their services sector share has been witnessed by Kerala and
Maharashtra, these have increased from around 38-40% in the 1980s to about 68% and
62% in 2010-11 respectively. Agriculturally dominating states like Punjab also had an
increase in the share of services sector from around 30% to 45% during the same period.
Small states like Delhi had the highest share of 70% in services throughout the period and
it has increased further to near 85% in 2010-11. Eastern states like Meghalaya, Tripura
and Nagaland also had a share of 50% or more in services during the most part of the
period under review. Emerging new states viz., Uttrakhand (to more than 50%) and
Chattisgarh(to near 40%) witnessed increasing share of services sector while that of
Jharkhand hovered around less than 30% in the 1990s which increased to 43% in 201011.
It is clear from the Table 5.5 that Gujarat has been the fastest growing state during
the entire period 1980-81 to 2008-09 and in all the sub –periods since 1991, having
recorded a GSDP growth rate of 9.48% during 1991-2001 and 11.71% during 2001-2009.
Odisha has experienced the second highest growth, after Gujarat during 2001-09. Kerala
is another state where both growth rate and structural transformation have been fast.
Among the North Eastern states, Mizoram, Nagaland and Sikkm are the fastest growing
states, having recorded a GSDP growth rate of 10& per annum during 1981-2009. The
growth rate of Punjab has been one of the lowest around 5% against the National average
of 7% during 1980-81 to 2008-09. During 2000-01 to 2008-09 when the national
economy grew at 8.3% per annum Punjab’s economy grew at 5.4%. Tamil Nadu has also
not done very well in terms of the growth of its GSDP. The state experienced an average
91 | P a g e
growth rate of 6.5% over the period 1980-81 to 2008-09, though it has accelerated to
7.6% during 2001 to 2008-09.
Table: 5.5 Trend Growth Rate in Total GSDP
States
1980-81/1990-91
1990-91/2000-01
2000-01/08-09
1980-81/2008-09
Andhra Pradesh
4.11
5.31
8.57
5.43
A & N Island*
5.6
5.05
13.52
6.76
Arunachal
11.82
3.67
9.97
6.49
Assam
Pradesh*
3.4
2.4
5.4
3.11
Bihar
4.57
3.2
7.17
3.81
Delhi
8.67
0.13
9.84
4.57
Goa*
4.65
7.15
11.2
6.4
Gujarat*
3.82
7.69
10.24
6.64
Haryana**
5.97
5.13
8.6
5.94
Himachal
4.85
6.35
7.74
5.98
Karnataka
Pradesh*
4.84
7.07
8.73
6.34
Kerala*
2.46
5.57
8.38
5.27
Madhya Pradesh
3.43
4.63
5.04
4.43
Maharashtra*
5.84
6.49
8.39
6.44
Manipur
2.82
9.98
5.43
5.52
Meghalaya
4.92
10.48
6.84
7.82
Nagaland**
18.8
8.81
6.36
12.96
Odisha
4.03
4.02
9.19
4.42
Puducherry
4.15
12.18
10.63
8.38
Punjab
5.04
4.69
5.39
4.67
Rajasthan
6.5
6.22
7.66
6.23
Tamil Nadu
5.06
6.48
7.59
5.88
Tripura*
5.58
12.76
8.03
9.1
Uttar Pradesh
4.64
3.97
3.91
4.35
West Bengal*
4.65
6.66
6.57
5.81
India
5.52
6.12
8.26
6.09
Source: www.mospi.bov.in
Note:
1. *Latest available data is for the year 2007-08.
2. ** Latest data available is for the year 2006-07.
92 | P a g e
Although the Indian states have long shared common political institutions and
national economic policies, there is wide diversity in other factors such as the level of
human resource development, the quality of infra structure, the economic policy
environment and the quality of governance.
There is an altogether different profile of India, a country with the largest number
of poor and destitute in the world. India also accounts for the largest number of illiterates;
and the largest number of unemployed. It has the largest number of anaemic women and
children, and huge infant/child and maternal mortality. Indians constitute about 17 per
cent of world population. But we account for about 35 per cent of the poor and 40 per
cent of the illiterates in the world. There are more poor and illiterates today than at the
time of independence sixty years ago. Our infant mortality is still about 60 per 1000 live
births, which is one of the highest in the world. More than 50 per cent of Indian women
and children are anaemic due to acute nutritional deficiency. India also experiences a
high incidence of morbidity and mortality on account of various waterborne diseases,
tuberculosis, diabetes, etc. These are not normal characteristics of a modern nation which
is aspiring to be a world economic power. A decent society cannot be built on the ruins of
hunger, our inherited past and the aspirations for the future are neglected beyond limit.
As a result huge damage is done to their physical and mental health. If the trend
continues, our chances of gaining from globalization on the strength of our human
resources are slim.
As per the UNDP Human Development Report 2009 (HRD 2009), India ranked
134 out of 182 countries of the world placing it at the same rank as in 2006. However, the
HDI value of India has increased gradually from 0.427 in 1982, 0.556 in 2000 and went
up to 0.612 in 2007, but it is still in the medium Human Development category with even
countries like China, Sri Lanka and Indonesia having better ranking (Table 5.6).
93 | P a g e
Table: 5.6 Human Development Index
Country
1980
1985
1990
1995
2000
2005
2006
2007
Poland
--
--
0.806
0.823
0.853
0.871
0.876
0.880
Brazil
0.685
0.694
0.710
0.734
0.790
0.805
0.808
0.813
Russia
--
--
0.821
0.777
--
0.804
0.811
0.817
Turkey
0.628
0.674
0.705
0.730
0.758
0.796
0.802
0.806
Thailand
0.658
0.684
0.706
0.727
0.753
0.777
0.780
0.783
China
0.533
0.556
0.608
0.657
0.719
0.756
0.763
0.772
Sri Lanka
0.649
0.670
0.683
0.696
0.729
0.752
0.755
0.759
Indonesia
0.522
0.562
0.624
0.658
0.673
0.723
0.729
0.734
Vietnam
--
0.561
0.599
0.647
0.690
0.715
0.720
0.725
Egypt
0.496
0.552
0.580
0.631
0.665
0.696
0.700
0.703
India
0.427
0.453
0.489
0.511
0.556
0.596
0.604
0.612
Source: Human Development Report , 2009
In fact India lags behind in various social indicators of development. There is a
huge gap between India and developed world and even many developing countries.
In
respect of health and education, which needs to be bridged at faster pace. According to
HDR, life expectancy at birth in India was 63.4 years in 2007 as against 80.5 years in
Norway, 81.4 years in Australia 74.0 years in Sri Lanka and 72.9 years in China. Adult
literacy rate (aged 15 and above) in 1999-2007 was 66.0 percent in India as against near
100 percent in China and 92.0 percent in Indonesia. In the case of combined gross
enrolment ratio in education also India was much below the level achieved by some other
comparable countries like China, Norway and Thailand etc.
Poverty is another major issue in India. In the country as a whole, the number of
persons below the poverty line declined from 44.5 percent in 1993-94 to 36 percent in
1993-94 and to 26.10 percent in 1999-00 and increased to 27.5 percent in 2004-05. As
per the official estimates, the incidence of poverty has declined over the years though it
remains still at a very high level. However not only the rate is still high, but also the rate
of decline in poverty has not accelerated along with the growth in the GDP.
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Table: 5.7 Trends in poverty in India
Poverty (head count index) percentage
Year
Number
of
Poor (million)
Rural
Urban
Total
1973-74
56
49
55
321
1983-84
46
41
45
323
1993-94
37
32
36
320
2004-05
28
26
28
302
Source: Reserve Bank of India occasional papers.
Moreover, the absolute number of poor people below poverty line has declined
only marginally from 320 million in 1993-94 to 302 million in 2004-05. This
performance is all the more disappointing since the poverty line on which the estimate of
the poor is based is the same as it was in 1973-74 when per capita incomes were much
lower. If we take the World Bank measurement of poverty about 41.6 percent (as per
PPP) of population is below poverty line which is much higher than the official national
poverty ratio of about 28 percent. It can further be stated that around 80.0 percent of the
poor are from rural areas.
From the table 5.8 it is clear that poverty is mostly concentrated in few states, viz
Bihar (41.4 percent), Madhya Pradesh (38.3 percent), Maharashtra (30.7 percent), Odisha
(46.4 percent) and Uttar Pradesh (32.8 percent). These states are among those which has
higher poverty ratio than the national average of 27.5 percent in the year 2004-05.
Poverty is concentrated among agricultural labourers, casual workers, schedule cast and
Schedule Tribes.
95 | P a g e
Table: 5.8 Poverty rates across states
State / UT
1983-84
1993-94
1999-00
2004-05
Andhra Pradesh
28.9
22.2
15.8
15.8
Arunachal Pradesh
40.9
39.4
33.5
17.6
Assam
40.8
40.9
36.1
19.7
Bihar
62.2
55.0
42.6
41.4
Goa
18.9
14.9
14.4
13.8
Gujarat
32.8
24.2
14.1
16.8
Haryana
21.4
25.1
8.7
14.0
Himachal Pradesh
16.4
28.4
7.6
10.0
Karnataka
38.2
33.2
20.0
25.0
Kerala
40.4
25.4
12.7
15.0
Madhya Pradesh
49.8
42.5
37.4
38.3
Maharashtra
43.4
36.9
25.0
30.7
Manipur
37.0
33.8
28.5
17.3
Meghalaya
38.8
37.9
33.9
18.5
Mizoram
36.0
25.7
19.5
12.6
Nagaland
39.3
37.9
32.7
19.0
Odisha
65.3
48.6
47.2
46.4
Punjab
16.2
11.8
6.2
8.4
Rajasthan
34.5
27.4
15.3
22.1
Sikkim
39.7
41.4
36.6
20.1
Tamil Nadu
51.7
35.0
21.1
22.5
Tripura
40.0
39.0
34.4
18.9
Uttar Pradesh
47.1
40.9
31.2
32.8
West Bengal
54.9
35.7
27.0
24.7
Delhi
26.2
14.7
8.2
--
All India
44.5
36.0
26.1
27.5
Source: Reserve Bank of India Occasional Papers.
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Table: 5.9 Male-female Literacy Gap in India
States/UT
Literacy Rate 1991
census
Male
Female
Literacy
Gap
Literacy Rate 2001
census
Male
Female
Literacy
Gap
Rajasthan
55.0
20.4
34.6
75.7
43.9
31.9
Jharkhand
55.8
25.5
30.3
67.3
38.9
28.4
Uttar Pradesh
54.8
24.4
50.5
68.8
42.2
26.6
Bihar
51.4
22.0
29.4
59.7
33.1
26.6
Madhya Pradesh
58.5
29.4
29.2
76.1
50.3
25.8
Chhattisgarh
58.1
27.5
30.6
77.4
51.9
25.5
Odisha
63.1
34.7
28.4
75.4
50.5
24.8
Uttarakhand
72.8
41.6
31.2
83.3
59.6
23.7
Haryana
69.1
40.5
28.6
78.5
55.7
22.8
Gujarat
73.4
48.9
24.5
79.7
57.8
21.9
Arunachal Pradesh
51.5
29.7
21.8
63.8
43.5
20.3
Andhra Pradesh
55.1
32.7
22.4
70.3
50.4
19.9
Manipur
71.6
47.6
24.0
80.3
60.5
19.8
Karnataka
67.3
44.3
22.9
76.1
56.9
19.2
Maharashtra
76.6
52.3
24.2
86.0
67.0
18.9
Tamil Nadu
73.8
51.3
22.4
82.4
64.4
18.0
Himachal Pradesh
75.4
52.3
23.2
85.4
67.4
17.9
West Bengal
67.8
46.6
21.3
77.0
59.6
17.4
Assam
61.9
43.0
18.8
71.3
54.6
16.7
Sikkim
65.7
46.8
18.9
76.0
60.4
15.6
Puducherry
83.7
65.6
18.1
88.6
73.9
14.7
Goa
83.6
67.1
16.6
88.4
75.4
13.1
Delhi
82.0
67.0
15.0
87.3
74.7
12.6
Punjab
65.7
50.4
15.3
75.2
63.4
11.9
Nagaland
67.6
54.8
12.9
71.2
61.5
9.7
Kerala
93.6
86.2
7.5
94.2
87.7
6.5
Meghalya
53.1
44.9
8.3
65.4
59.6
5.8
India
64.1
39.3
24.9
75.3
53.7
21.6
Source: Selected Socio Economics Statistics, India, CSO.
97 | P a g e
The trend in the gender disparity is another important indicator of growth. India
has made significant strides in terms of reducing the gender disparities as reflected in
various indicators. For instance, the female life expectancy at birth, the female literacy
level and the share of women employed in the non agricultural sector have improved
since 1990. The male female literacy and literacy gap during the last two censuses across
states are given in the table 5.9. Though the literacy gap across states has visibly come
down over the decade, in many states and Union Territories, it is more than the national
average. Literacy gap is highest among the North Indian states with the exception of
Punjab, Himachal Pradesh and Chandigarh. However, for Punjab, the low literacy gap is
more to do with the low literacy rates which is worrisome phenomenon considering that
Punjab ranks in terms of per capita in NSDP.
Table: 5.10 Percentage of population living with housing amenities(Lighting.)
1999-2000
2005-06
Rural
Urban
Rural
Urban
No Lighting
0.5
0.3
0.5
0.2
Kerosene
50.6
10.3
42.2
7.2
Other oil
0.2
0.1
0.2
0.1
Gas
0.1
0.1
0.1
0.1
Candle
0.1
0.0
0.2
0.3
Electricity
48.4
89.1
56.3
92
Other
0.1
0.1
0.5
0.1
Not Recorded
0.0
0.0
0.0
0.0
All
100
100
100
100
Source: Selected Socio Economic Statistics, India, CSO.
Another aspect of looking into the development of the region is the provision of
basic facilities. Table 5.10 provides the data on the percentage of population with housing
amenities . While there is significant improvement in the availability of electricity, there
is huge difference in rural urban. While only 8 percent of urban population is not having
electricity, the share is 44 percent in the case of rural areas. The above indicators
provided significant facts on differences in the socio economic conditions across regions.
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Table: 5.11 Selected Indicators of Human Development for major States
Infant Mortality Rate
Life expectancya at
State
(per 1000 live births)
birth (2002-2006)
Male
Andhra
(2010)
Female Total Male
Female
Total
Birth rate (per
1000) (2010)
Death rate
(per 1000)
(2010)
62.9
65.5
64.4
44
47
46
17.9
7.6
Assam
58.6
59.3
58.9
56
60
58
23.2
8.2
Bihar
62.2
60.4
61.6
46
50
48
28.1
6.8
Gujarat
62.9
65.3
64.1
41
47
44
21.8
6.7
Haryana
65.9
66.3
66.2
46
49
48
22.3
6.6
Karnataka
63.6
67.1
65.3
37
39
38
19.2
7.1
Kerala
71.4
76.3
74
13
14
13
14.8
7.0
58.1
57.9
58
62
63
62
27.3
8.3
Maharashtra
66.0
68.4
67.2
27
29
28
17.1
6.5
Odisha
59.5
59.6
59.6
60
61
61
20.5
8.6
Punjab
68.4
70.4
69.4
33
35
34
16.6
7.0
Rajasthan
61.5
62.3
62
52
57
55
26.7
6.7
Tamil Nadu
65.0
67.4
66.2
23
24
24
15.9
7.6
60.3
59.5
60
58
63
61
28.3
8.1
64.1
65.8
64.9
29
32
31
16.8
6.0
62.6
64.2
63.5
46
49
47
22.1
7.2
Pradesh
Madhya
Pradesh
Uttar
Pradesh
West
Bengal
India
Source: Sample Registration System, Office of the Registrar General, India, Ministry of
Home Affairs
Note:
a
Data relating to Bihar, M.P. and U.P. includes Jharkhand, Chittisgarh and
Uttarakhand respectively.
99 | P a g e
In case of infant mortality rates, the disparity is very high (Table 5.11). It ranges
from 13 in Kerala to 62 in Madhya Pradesh against national average of 47.In 2010 among
the states which had higher birth rate than the national average of 22.1 percent that year
the highest was in Uttar Pradesh (28.3) followed by Bihar(28.1), Madhya Pradesh (27.3),
and Rajasthan (26.7) (Table 5.11). Kerala is on the top in
life expectancy (74) , infant
mortality rate (13) and in case of birth rate and death rate it is 14.8 and 7.0 respectively.
Kerala has been praised for its achievement on human development specially eduction
and health.
Employment growth in the organised sector, both public and private combined
has declined during the period 1994 and 2007. This has happened to the decline of
employment in the public organised sector. Employment in the organised sector grew at
1.20 percent per annum during 1983-94 but declined to (-)0.03 percent per annum during
1994-2007.
Table: 5.12 Rate of growth of employment in organised sector. (% per annum)
Sector
1983-94
1994-2007
Public Sector
1.53
-0.57
Private Sector
0.44
1.30
Total Organised
1.20
-0.03
Source: Economic Survey 2009-10, Government of India.
However, the decline in employment during the later period was mainly due to
decline in the public sector establishments from 1.53 percent in the earlier period to (-)
0.57 percent in the later period where as the private sector showed moderate growth of
1.30 percent per annum.
According to NSSO data compared to 1999-00, during 2004-05 the
unemployment rate in terms of the usual status remained almost the same in rural and
urban areas for males, though it hs increased by around 2 percentage points for females as
can be observed from the table 5.13. Overall employment rates are not too high.
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Table: 5.13 Unemployment rates in India according to usual status, current weekly status
and current daily status 1993-94 to 2004-05.
Male
Female
Year (round)
Usual Status CWS
CDS
Usual Status
CWS
CDS
Rural
1993-94 (50th round)
2.0
3.1
5.6
1.3
2.9
5.6
1999-00 (55th round)
2.1
3.9
7.2
1.5
3.7
7.0
2004-05 (61st round)
2.1
3.8
8.0
3.1
4.2
8.7
Urban
1993-94 (50th round)
5.4
5.2
6.7
8.3
7.9
10.4
1999-00 (55th round)
4.8
5.6
7.3
7.1
7.3
9.4
2004-05 (61st round)
4.4
5.2
7.5
9.1
9.1
11.6
Source: NSSO, 61st round.
Note: CWS: Current Weekly Status, CDS: Current Daily Status.
However urban unemployment rates are higher than the rural rates.The
unemployment rates according to current daily status (CDS) approach are higher than the
rate obtained according to ‘usual status’ approach and ‘weekly status’ approach, thereby
indicating a high degree of intermittent unemployment. The unemployment measured
though the usual status is very low in the rural areas.
101 | P a g e
Economic development and social development are mutually reinforcing.
Disparities in economic development and social development are also mutually
reinforcing.
Socially
excluded
are
economically
marginalized.
Economically
marginalized remain socially excluded. The gains of economic development accrue
disproportionately to the socially developed groups. The economic gains will help them
to further horn up their social skills which in turn will enable them to gain even more
from the economic opportunities. On the other hand, socially backward may gain only
marginally from economic development which may not be sufficient for them to improve
their social skills to enable them to earn more. This vicious circle transcends from
generation to generation. There exist several dimensions of economic and social
disparities of development in the country.
.
102 | P a g e
Chapter-VI
REGIONAL DISPARITIES IN
SERVICES SECTOR IN INDIA
A number of studies have looked at the trends in regional inequality
among the regions of the Indian economy. Beginning with Cashin and Sahay (1996), they
found that over 1961-91 there was a widening of the dispersion of real per capita NSDP
for the Indian states. However Cashin and Sahay reports evidence of weak β
convergence. They also point out that the speed of convergence, 1.5 percent per year is
slower than that of regional convergence in industrial economies (Australia,U.S, Canada
and Japan). Whose rate of convergence has been 2 percent. Bajpai and Sachs (1996)
found evidence of divergence of state Domestic Products in the time period 1971-93.
They also found evidence of a weak positive relationship between initial State Domestic
Product and the economic growth rate in the same time period 1971-1993. Das and Barua
(1996), Nagaraj, Varoudakis and Veganzones (2000), Rao, Shand and Kalirajan (1999)
and Yagci (1999) also found similar evidence of divergence in India. Yagci reports that
higher income sttes have grown faster since 1980 as compared to lower income states.
Most of these studies cover the period until mid 1990s.
Although a few recent studies cover the entire 1990s, a decade that is useful in
understanding the effect that the reforms has had on regional disparity. the most
influential studies in this context is by, Ahluwalia (2000,2002) which use population
weighted Gini coefficient and show that inequality in real per capita gross state domestic
product (GSDP) has tended to rise particularly in the 1990s. Confirming the rising trend
of disparity, Shetty (2003) too observes that regional disparity did increase, whether
measured at 1980-81 prices or 1993-94 prices for the period from 1980-81 to 2000-01.
For convenience the scholars restricted their analysis to only major Indian states on state
domestic product (SDP) data in view of data limitations associated with smaller states
and union territories in India. Breaking from this trend Shetty calculates the regional
inequality based on all states and union territories of India and find that the disparity is
103 | P a g e
much higher compared to that which is based on major states only. The estimated Gini
coefficients from both Ahluwalia and Shetty show that during the 1980s regional
inequality remained stable till about 1986-87 and started increasing slowly thereafter but
not as fast as in the 1990s.
B.B. Bhattacharya and Sakthivel (2004) analyses the growth rates of aggregate
and sectoral domestic product of major states in the pre and post reform decades. The
results indicate that while the growth rate of gross domestic product has improved only
marginally in the post-reform decade regional disparity in state domestic product (SDP)
has widened much more drastically. The coefficient of variation of per capita GSDP
which was 0.22 percent per annum in the 1980s doubled to 0.43 percent per annum
during the 1990s.
Similarly, Rao et al (1999) find enough evidence of widening interstate
income disparities for the period from 1960-61 to 1994-95. Computing standard deviation
of log of per capita SDP for 14 major Indian states, the dispersion appears to have
increased steadily from 0.22 in 1965-66 to 0.40 in 1994-95. A closer look at these values
indicates that aggregate inequality did not rise much during the 1980s whereas there is a
definite rise during the initial years of the 1990s. These results were also in conformity
with Nagaraj et al (1998) that show the coefficient of variation of per capita SDP had
tended to fall in the 1960s attributed largely to the impact of green revolution, especially
in rural India. However the regional disparity shot up, more sharply in the 1970s, less
markedly during the 1980s and continuing to grow during the first half of the 1990s.
Similarly Sabyasachi Kar and S. Sakthivel (2007) too observe that regional inequality in
India remained largely unchanged during the 1980s but rose dramatically after the
adoption of the reforms. This is mainly due to the fact that the per capita output from the
industrial and services sectors showed convergence before the reforms and divergence
afterwards.
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Table: 6.1 Aggregate Regional Inequality in Indian Economy (1980-2010)
Years
Aggregate
inequality
Years
Aggregate
inequality
Years
Aggregate
inequality
1980-81
.28
1990-91
.30
2000-01
.33
1981-82
.27
1991-92
.30
2001-02
.33
1982-83
.27
1992-93
.34
2002-03
.35
1983-84
.27
1993-94
.33
2003-04
.35
1984-85
.28
1994-95
.32
2004-05
.37
1985-86
.29
1995-96
.34
2005-06
.40
1986-87
.28
1996-97
.35
2006-07
.40
1987-88
.29
1997-98
.34
2007-08
.41
1988-89
.29
1998-99
.36
2008-09
.40
1989-90
.31
1999-00
.33
2009-2010
.41
Source: Calculated from the Data from CSO and CMIE.
We find from the table that the aggregate inequality that remained almost
unchanged (around .28) during the 1980s but showed a distinctly rising trend during the
1990s and 2000s (from .30 to .41). India has seen a constant rise in regional disparity
from 1980 to 2010 followed by a slight fall in 1999-00 (from .36 to .33). Regional
inequality dramatically increased in 1992 after the liberalization reforms started.
On regional inequality there is an alternative theoretical literature that focuses on
the increasing returns associated with the process of growth that may lead to regional
divergence. This is the literature on agglomeration economies (Duranton and Puga 2004;
Rosenthal and Strange 2004). The central proposition of this literature is that economic
activities in general and industrial activity in particular, tend to be attracted to particular
geographical locations that are already developed compared to other regions. The result
of agglomeration economies is lead to urban concentration in these regions whose income
and growth rates keep diverging from those in the peripheral. Glaeser et al (1992) and
Henderson et al (1995) have focused on industrial growth in cities. Ciccone and Hall
(1996) on the other hand, focus on the states of the US economy and explain their labour
105 | P a g e
productivity in terms of measures of agglomeration economies like country level
employment densities. Ciccone (2002) studies the same issue for the European economies
and finds that the agglomeration effects are slightly smaller compared to the US
economy. Dekle and Eaton (1999) in a study on Japanese prefectures find that for finance
and manufacturing industries, there is evidence of agglomeration economies. These are
some empirical literature that tests for agglomerating forces and their effects across
regions. A particular strand of the agglomeration economies literature studies the impact
of reforms on regional inequality.
Going by Krugman and Livas Elizondo (1996) which is one of the earliest
contributions to this literature which defines that there are two types of economic forces
affecting regional inequality i.e. centripetal and centrifugal forces. Centripetal forces
increase the concentration of manufacturing activity near large markets and hence lead to
rising regional inequality while centrifugal forces push manufacturing activity to the
periphery thereby decreasing regional inequality. These studies adopt the ‘new economic
geography’ framework which assumes that there are economies of scale in production
and that in a protected economy manufacturers produce mainly for the domestic market.
The economies of scale warrant that production is located only in a few areas and in order
to minimize the transport cost of production, these locations have to be close to large
markets. On the other hand large markets are themselves created by those employed in
the manufacturing locations. These factors together generate centripetal forces that lead
to the development of a few regions while other regions fall behind, increasing the
regional inequality in the economy. The authors Krugman and Livas Elizondo suggest
that when trade is liberalized the centripetal forces become weaker because producers can
now depend on external demand. Hence proximity to local markets becomes irrelevant,
while the higher wages and land rent in the established markets act as centrifugal forces
compelling them to relocate to less established regions. Thus trade reforms help to bring
down the regional inequality in an economy. However this conclusion has been
challenged by other contributions to this literature. Paluzie (2001) shows that if labour is
mobile within the economy, then protectionist policies do not increase regional
inequalities. Moreover, with trade reforms, established regions with some initial
advantages may benefit more and hence regional inequality may go up.
106 | P a g e
By studying the regional inequality among 16 major states of India during
1980-81 to 2009-10. The states selected for this study are Andhra Pradesh, Assam, Bihar,
Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Madhya Pradesh, Maharashtra,
Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal. Three newly
formed states Namely Chattisgarh, Jharkhand and Uttranchal are taken from the time
period 2000-01 to 2009-10. Before that in order to avoid complexities arising out of the
re-organization of states data till 1999-2000 is used this is the last year from which data
from the undivided states are available. Bihar, Madhya Pradesh and Uttar Pradesh,
therefore refer to undivided states up till 1999-2000. These states together account for
91% population of India and the remaining 9% is spread in 13 smaller states and 7 Union
territories including Delhi(GOI 2001). The GSDP and the population Data for this study
are obtained from the Central Statistical organisation (CSO) and National Income
Statistics Centre for Monitoring Indian Economy (CMIE).We cover statewise time series
data on sectoral composition in percentages of GSDP as originating from agriculture,
Industry and Services for each of the states at constant prices for all the years covering
the data with four base years : 1980-81, 1993-94, 1999-2000 and 2004-05.
The regional inequality is measured by the weighted coefficient of variation of the
per capita income of these states. This measure is calculated as given below-
𝐶𝑉𝑤 =
√∑ni(𝑦𝑖 − y ∗ )2 𝑃𝑖
𝑃
𝑦∗
Where:Yi is the per capita GSDP of ith region
Y* refers to per capita GDP
Pi is the population of ith state.
P is the national population and
n refers to number of states.
107 | P a g e
Since the coefficient of variation is used to measure regional inequality, to
decompose the aggregate inequality to show the sectoral contributions and similar
changes in their trends a decomposition framework discussed in De Janvry and Sadoulet
(2001) in used as they uses the same statistic to measure inequality, Let there be n regions
such that the aggregate output of each region is given by Xi, i=1--------n, Let there be m
sectors that contribute to each regions aggregate output Xi, such that the output of each
sector in each region is given by Xij, i=1-----n, j=1-----m
1
Xi = Σj Xij
Then
Let X be the arithmetic mean of Xi and Xj be the arithmetic mean of Xij, Next
define Pj as the ratio between the average outputs of the jth sector and the average output
of the economy.
Xj
Pj =
Thus
2
X
Let C(Xi) be the coefficient of variation of aggregate output and let C(Xij) be the
coefficient of variation of the jth sector’s output across regions. Also let rij, i be the
correlation coefficient between the jth sector’s output and the aggregate output across
regions. Then the percentage decomposition of total inequality is given by De Janvry and
Sadoulet (2001).
Σ
j
C(Xij)
Pj x rij,i x
C(Xi)
Rearranging equation
C(Xi) =
Σ
i
=1
3
3 It can be written
{C(Xij) x Pj x rij,i}
4
Equation 4 indicates that the aggregate inequality in an economy measured by
the coefficient of variation of aggregate output across regions can be decomposed to give
each sector’s contribution. Furthermore the contribution of each sector is equal to the
product of108 | P a g e
 The inequality within the sector measured by the coefficient of variation of the
services sector output across regions.
 The relative size of the services sector measured by the average output of the
services sector as a proportion of the average output of the economy.
 The strength of the linkages between the services sector and the economy
measured by the correlation coefficient between the services sector’s output
across regions and the aggregate output across regions.
This means that the contribution of services sector is equal to the product of intra
sector inequality, the relative size of the sector and the strength of the linkages between
the sector and the economy. The inequality for the aggregate economy is affected not
only by the services sector’s inequalities but also by the relative size of the sector and
their interlinkage with the economy. The interlinkages of services sector with the whole
economy has an important role due to the fact that a high correlation between services
sector and the economy implies that a region that has a relatively high output from that
sector also has a relatively high aggregate output, while a region that has a relatively low
output from that sector also has a relatively low aggregate output. This means that for a
given level of inequality in the sector, an increase in the correlation coefficient increases
the economy’s inequality.
As far as the services sector is concerned, the reforms completely changed the
trends in its contribution from the constant trends during the 1980s to the sharply
increasing trends during the 1990s and 2000s. By looking at the trends in the values of
the three factors that determine the sectoral contribution we can throw more light on this
issue i.e.
 The coefficient of variation of the services sector.
 The relative size of the services section and
 The strength of the interlinkage between the services sector and the aggregate
economy.
109 | P a g e
Table: 6.2 Services sector’s contribution to Aggregate inequality and its
component.
Years
Intrasector
Relative size Interlinkage
1980-81
.32
.34
.90
Inequality
1981-82
.32
.34
.89
1982-83
.32
.35
.89
1983-84
.33
.34
.88
1984-85
.33
.35
.88
1985-86
.35
.35
.91
1986-87
.34
.37
.89
1987-88
.33
.38
.89
1988-89
.33
.36
.88
1989-90
.34
.37
.89
1990-91
.35
.37
.87
1991-92
.36
.38
.89
1992-93
.38
.38
.87
1993-94
.38
.39
.90
1994-95
.37
.38
.89
1995-96
.38
.40
.93
1996-97
.39
.40
.91
1997-98
.39
.41
.92
1998-99
.41
.42
.93
1999-00
.37
.46
.91
2000-01
.37
.47
.92
2001-02
.38
.48
.91
2002-03
.39
.49
.92
2003-04
.39
.48
.91
2004-05
.43
.48
.90
2005-06
.44
.48
.92
2006-07
.45
.49
.92
2007-08
.46
.49
.91
2008-09
.45
.51
.90
2009-10
.45
.52
.91
Source: Calculated from the Data from CSO and CMIE
Sectoral
.10
contribution
.10
.10
.10
.10
.11
.11
.11
.10
.11
.11
.12
.12
.13
.12
.14
.14
.15
.16
.15
.16
.16
.17
.17
.18
.19
.20
.20
.21
.21
110 | P a g e
Table 6.2 presents the breakup of the sectoral contribution in terms of intra sector
inequality, relative size and interlinkages for the three decades. From the table we find
that the services sector shows very interesting trends. It is clear that the contribution of
services sector that remained almost constant in the pre reform period, there was a
distinct rise in regional disparity in the post-reform periods. After the reforms the services
sector contribution to rose quite sharply (from .10 to .21) resulting in the consistant rise
in aggregate inequality throughout the 1990s (from .30 to .36) and 2000s (from .33 to
.40). The only year for which the aggregate inequality as well as intra sector inequality
shows a noteworthy dip (from .36 to .33) and (from .41 to .37) respectively is in the year
1999-00. The reason behind this sudden decline may be due to the lower growth rate
between 1998-00 due to stagnation or negative growth of East Asia economies.
Figure 6.1a Regional Inequality in India in 1980s.(Coefficient of Variation)
0.4
0.35
0.3
0.25
0.2
Aggregate Inequality
Services sector Inequality
0.15
0.1
Contribution of Services
Sector to Aggregate
Inequality
0.05
0
111 | P a g e
Figure- 6.1b Regional Inequality in India in 1990s.(Coefficient of Variation)
0.45
0.4
0.35
0.3
Aggregate Inequality
0.25
0.2
Services Sector Inequality
0.15
0.1
Contribution Of Services
Sector to Aggregate
Inequality
0.05
0
Figure- 6.1c Regional Inequality in India in 2000s (Coefficient of Variation)
0.5
0.45
0.4
0.35
Aggregate Inequality
0.3
0.25
Services Sector Inequality
0.2
0.15
0.1
Contribution of Service
Sector to Aggregate
Inequality
0.05
0
112 | P a g e
The figure 6.1a, 6.1b and 6.1c shows the population weighted coefficient of
variation for the three decades. It becomes clear from this figure that regional disparity
remained largely unchanged during the 1980s but showed a distinctly a rising trend
during the 1990s and 2000s. Since the trends remained largely unchanged during the
1980s the centripetal and the centrifugal forces balanced each other during this period.
While the agglomeration economies provided the centripetal force, the centrifugal forces
worked probably generated by the government’s efforts to achieve a spatially balanced
growth by channelling development towards backward areas however in the 1990s and
2000s the rise in regional inequality clearly supports the hypothesis from Paluzie (2001)
which predicts increasing regional disparity following reforms. This implies that the
centripetal forces became stronger than the centrifugal forces during this period. This
may have happened because the reforms weakened the centrifugal forces and
strengthened the centripetal forces in the post reform period. It appears from the figures
that (Figure 6.1a.1b and 1c) this pattern of changes in the services sector inequality seems
to be in line with the changes in aggregate inequality.
In the pre reform period, the government’s policies targeted to check regional
divergence worked through multiple channels. One channel worked through the public
sector, where sizeable parts of the public investment were made in relatively backward
areas. The other channel worked through the private sector, which was encouraged
through the use of fiscal incentives and industrial licensing to invest in these areas. In the
other words the state played a crucial role in bringing down inequality in the services
sector during this period. In the post reform period services sector shows the divergence
due to a number of reasons:Generally the rate of investment is regarded as one of the most important factors
explaining growth in any economy, and it is therefore appropriate to consider whether
inter-state differences in growth are associated with differences in the rate of investment
in individual states. It is very likely that in practice this led to a reallocation of investment
in favour of states perceived as having better infrastructure facilities, better labour skills
and work culture and a more investor friendly environment. This could lead to a
substantial increase in investment in the better performing states and a consequent
113 | P a g e
increase in their growth rate, with a corresponding reduction in investment in less well
endowed or well governed states and a deceleration in their growth. The quality of
infrastructure is also regarded as an essential determinant of growth in the states such as
electric power, road and rail transportation, ports and airports and telecommunications.
Good infrastructure not only increases the productivity of existing resources going into
production and therefore helps growth, but also helps to attract more investment which
can be expected to increase growth further.
There could be several reasons for increasing regional inequality in India. One
explanation could be that India is in early stage of development and therefore is on the
wrong side of the “Inverted U” pattern of regional inequalities (Williamson, 1965).
Another reason could be the relatively high barriers to interstate trade in India. A third
reason could be the perverse nature of the central government’s regional development
policies and the inter-governmental transfer system.
Accelerated private investments also generate their multiplier effects on social
development. Better quality educational and health facilities have been financed by the
private sector which reduced the pressure on public facilities. More than 70 percent of the
engineering graduates are coming out from the colleges of just four states viz.’ Andhra
Pradesh, Karnataka, Maharastra and Tamil Nadu. The IT boom in these states can be
explained, to a large extend by the explosion of engineering education in these states.
There has been a consistent rise in service exports, especially of software and
computer related services since 1990s. Increase in service exports has been due to
advancement in technology and trade liberalization. Since these facilities were mostly
available in the relatively developed states in the western and the southern part of the
country, this preference increased the regional inequality between these states and the
poorer ones. Share of exports in the services sector rose from about 3.2 percent in 199091 to about 15.1 percent in the 2008-09 (Source: RBI Handbook of statistics). A major
development in India's export scenario in recent decades has been a fast growth in export
of services even during the period of crises in the global economy.
114 | P a g e
The allocation of plan funds across the states has been made in accordance with
the level of income of the states, that is the poorer states have been receiving
proportionately larger amount of development funds relative to their richer counterparts,
Such type of positive discrimination rising regional disparity may be the outcome of
lower efficiency with which public capital is utilised and also of infrastructural disparity
across the states.
The industrial licensing system was dismantled as a part of the reforms, which
also determined the location of investment gave the private sector the freedom to choose
its location and minimise the transportation cost to large domestic market. The result was
a shift of their production base to the metropolitan areas of the richer states, which
covered most of the large domestic markets in the country. The manufacturing exports
sector needed to minimise transportation costs to international markets and hence
preferred to locate it near the coastal areas that had good infra structure. Since these
facilities were mostly available in the relatively developed states in the western and the
southern parts of the country this preference increased the regional inequality between
these states and the poorer ones.
115 | P a g e
Chapter-VII
SUSTAINABILITY OF SERVICES
SECTOR
India’s emergence as one of the fastest growing economies in the 1990s is largely
attributed to the rapid growth of its services sector. The services sector grew in this
decade at an average of 7.9% per annum, far ahead of agriculture (3%) and
manufacturing (5.2%). The contribution of services to gross domestic product (GDP) has
been more than 50 % per annum since year 2000. The share of services sector in trade has
also increased substantially. This growth has been accompanied by increasing foreign
direct investment (FDI) approvals in services sector. Though these trends are mainly in
line with global trends, two features are distinctive to India’s services sector.
First, in the period 1950s to 1990s the share of agriculture in GDP declined by
about 25 percentage points while industry and services sector gained equally. The share
of industry in GDP has stabilized since 1990 and consequently the entire subsequent
decline in the share of agriculture in GDP has been picked up by the services sector. This
trend of rising share of services in GDP and corresponding decline in the share of
agriculture and manufacturing sector is seen in the growth process of high-income
countries and generally not in developing countries. During the 1990s, the contribution of
the services sector to the growth of GDP in India was nearly 46% in comparison to 54%
in middle-income countries and 43% in least developed countries. The contribution of
the services sector to the growth of GDP in China was 34%. Secondly, employment in
services has not been in proportion to their rising share in GDP and trade in India.
Employment in services sector has been in proportion to their rising share in GDP in rest
of the world.
In 1999-2000 services contributed around 24% of employment in India. Services
contributed to 30% in middle-income countries. It contributed 70% in Singapore and
116 | P a g e
around 35% in Thailand. These features of India’s services-led growth cast doubts
on its sustainability in the long run.
Growth in India’s services sector has not been uniform across services. While
some sectors experienced a double-digit growth rate like communication and business
services some have experienced a fall in their growth rates like railways, real states and
dwellings. The sector that have witnessed negative growth rates and those that have
experienced slow growth rate are also the sectors that have large potentials for generating
employment like construction, transport and professional services. Prime drivers of
growth were business services. It grew by almost 20%, communication services grew by
about 13.6%, banking services grew by about 13% and hotels and restaurants grew
around 9%. Among the services witnessing a decline in growth were railways, dwellings
and real estate, legal services, public administration and defence services. In terms of
share in GDP the most important services are wholesale and retail trade at 14%
followed by community services at 8.4% and banking and insurance services at 7%.
Growth of employment differed significantly across services in the period 1994-2000 as
compared to 1983-1994. Growth of employment fell in community, social and personal
services from 3.85% to 2.08%. Fall in employment in this sector has important
implications for employment potential of the entire services sector since this sector
witnessed a rise in its growth and share in GDP in the 1990s. Other sectors where
employment growth fell are electricity, gas and water supply.
In 1999-00 the share of different services in employment was as follows:
Trade, Hotels and Restaurants around 34%

Community, Social and Personal Services around 31%

Construction around 16%

Transport, Storage and Communication Services around 13%
The trends in employment elasticity of different services sectors have also
changed considerably in the 1990s (Table 7.1). The trends show that employment
elasticity in the economy declined sharply from 0.41 in the 1980s to 0.15 in the 1990s but
it increased substantially in transport, storage and communication sectors. Employment
117 | P a g e
elasticity has fallen in sectors that are growing faster and make a relatively higher
contribution to GDP like community, social, personal services and financial services.
Employment elasticity fell also in wholesale and retail trade, which provided maximum
employment in the services sector.
Table: 7. 1 Trends in employment elasticity and growth in employment.
Employment Elasticity
Sub-Sectors
Trade
Transport,
Storage
and
Communication
Financial Services
Community
Social
Personal Services
Total
and
1983-84
1993-94
to
to
1993-94
1999-00
0.63
Annual
Growth
in
Employment (UPSS) (%)
1983-84
1994-00
0.55
3.57
5.04
0.49
0.69
3.24
6.04
0.92
0.73
7.18
6.20
0.50
0.07
2.90
0.55
0.41
0.15
2.04
0.98
Source: Government Of India, 2001.
It is thus seen that though services have been the fastest growing sector in the last
decade and have contributed more than 50% to GDP but still they provide less than 25%
of total employment. Employment growth within the services sector has been uneven.
Those services which have witnessed very high growth rates like business and
communications services have a low share in GDP or employment. Employment
elasticity has declined in most of the services with significant share in GDP like trade,
community services and banking and insurance in the latter half of the 1990s.
This growth has three plausible explanations. First, sectors that have large
potential for generating employment like construction transport and professional services
have grown slowly. Faster growing sectors like services, communications and financial
business services have a low potential for employment generation. In addition,
employment elasticity has declined in the fast growing services like financial and
118 | P a g e
community services. The rising productivity levels in the faster growing services
themselves may be a reason for lack of growth in their employment potential. Because of
the difficulty in measuring their output there are only few studies which have estimated
productivity growth in services. One of these studies, by McKinsey & Co. (2001)
estimates labour productivity in six segments of India’s services sector namely:
Telecommunication

Software

Retail banking

Housing

Construction

Energy distribution and retail distribution
It finds that software services have the highest productivity levels followed by
telecommunication, banking, and construction. These are also services that are growing
faster and have high shares in GDP and employment. Higher labour productivity in these
segments may have slowed down growth in employment in services. Communication and
software services have witnessed an increase in their trade and therefore have grown
substantially but they have a small employment potential. Therefore we can say that trade
liberalization in services has not helped in generating large employment.
Services sector growth studies by Gordon and Gupta (2004) and Banga and
Goldar (2004) empirically assess the reasons for the growth of India’s services sector in
the 1990s conclude that both demand and supply factors have led to this growth. On the
demand side the high growth of services output was mostly attributed to factors such as
increasing input usage of services by other sectors, mainly manufacturing sector (higher
domestic demand); higher foreign demand due to trade liberalization and high income
elasticity for services. On the supply side, the increased trade in services following trade
liberalization policies and other reforms in the 1990s induced this growth.
On the demand side Banga and Goldar (2004) show that the contribution of
services input to output growth in manufacturing (organized) was about 1% in the
1980s and it increased to about 25% in the next decade. Gordon and Gupta (2004) show
119 | P a g e
that the use of services sector input to industry increased by about 40% between
1979-80 and 1993-94. The role of elastic final demand for services is difficult to measure
since it is difficult to split the growth in private final consumption expenditure into
expenditure on goods and that on services. They use a rough estimate and conclude that
there has been a sharp growth in the final demand for services in the 1990s.
On the supply side, the percentage share of exports of services vis-à-vis
merchandise exports in GDP has steadily risen. The share of services in trade increased to
24.9% in 1998 from 19.3% in 1995. Services that contributed substantially to India’s
exports in the early 1990s were transport, travel, communication and financial services.
However, the composition of India’s exports of services has changed over the years. In
the period 1990-95 and 1996-2002 the relative share of travel in exports has fallen from
39% to 23% and of transportation services from 24% to 15%. In contrast the share of
software services has risen sharply from 34% to 60%. In fact, India has become a net
foreign exchange earner in total services after 1997-98. Net foreign exchange earning
services are mainly travel, communication and software services. India is a net importer
in services like transport, management and financial services.
Thus, the growth of India’s services sector may be attributed to: Structural changes that have led to increase in usage of services
 by other sectors.
 Trade liberalization in services.
 Other reforms carried out in the 1990s.
India’s services sector has witnessed tremendous growth in the last ten years but
its employment potential has not grown proportionately. There has been no
corresponding growth in manufacturing which is one of the largest consumers of
services. This has cast doubts on the sustainability of services-led growth. Services that
have increased their share in GDP and trade have small employment potential and their
employment elasticity has fallen due to rising labour productivity. One possible reason
for this lopsided growth in services is lack of a coherent policy with respect to services.
Reforms at the sectoral level have evolved in an ad-hoc uneven manner due to lack of an
120 | P a g e
integrated services policy. Liberalizing a particular service like retail trade will fall short
of the desired impact if it is not supported by liberalization in real estate.
Similarly, reforms in tourism will remain half measures unless corresponding reforms are
undertaken in domestic air travel. Due to the large externalities of services it is important
to provide services as efficiently as possible. The three services having the largest
backward and forward linkages are trade, transport and construction. Transport (road,
railways and air) and construction services have large external economies and linkages
but in India these two sectors have been slow-growing. Improving these infrastructure
facilities will not only enhance the country’s attractiveness to foreign investment but also
improve the competitiveness of domestic investment. These sectors also have large
potential for generating employment.
Trade in services can suffer from both external and domestic constraints. External
constraints or trade barriers are mainly in the form of limits on foreign equity
participation, recognition, licensing of provisions, immigration, labour market regulations
and discriminatory treatment with respect to taxes, subsidies and other policies. Domestic
constraints may result from infrastructure inadequacies, poor quality and standards,
lack of clear-cut responsibilities between central and state governments and other
policy-related disincentives. Given the large potential for trade in these services there is a
need for specific policies and they should be designed to encourage trade in health and
education sectors. In particular, given the low-cost quality treatment available in India
there is a large scope for health tourism. India also has a competitive advantage in the
practice of alternative medicine. These areas should be developed and exploited for trade
opportunities. Since the health sector is on the concurrent list a number of regulations are
imposed by the state governments. Though there is no cap on FDI in health services still
the share of health services in total trade and FDI remains low (only 0.4% of FDI
approvals in health). There is a need to have a clear-cut demarcation of responsibilities of
Centre and State in this sphere. To improve trade in education services there is a need to
study the system of regulation and accreditation of educational institutions in foreign
countries and accordingly develop own accreditation system. To compete successfully
with the existing reputed educational testing services such as GRE, GMAT and TOFEL,
our reputed testing services such as CAT, GATE, JEE and others must upgrade and
121 | P a g e
modernise. There is also a need to improve on educational database regarding number of
educational institutions, their enrolments (domestic and foreign), faculty strength,
financial sources and quality and accreditations.
There are services that are less than moderately liberalized or are restricted with
high external trade barriers and low growth like legal professional services, accountancy
and rail transport. These services also have a low share in exports, which reflects both
domestic and external constraints to their trade. On the whole, infrastructure services like
transport and construction are slow growing and have a low share in trade in spite of the
efforts to lower external trade barriers to them. In other words high domestic constraints
impede their growth and trade. In contrast, the financial infrastructure of India appears to
be stronger and services like software, banking, insurance and telecommunications show
low external trade barriers and high growth rates with high to moderate share in total
exports. Health and education have experienced high growth rates and have a large
potential for trade.
In trade liberalization of services the social costs involved also need to be
considered. This is particularly relevant for the Indian economy given the employment
dimension of the services sector. An argument put forward against trade liberalization in
services is the displacement of labour towards sectors where an economy has competitive
advantage. If these sectors lack large employment potential trade can lead to growth in
unemployment. Some of the services that have traditionally been under the public sector
like railways have surplus labour. Higher extent of trade liberalization in these sectors
might result in large displacement of labour. Similar concerns also apply to sectors
like retail distribution which employs a large number of unskilled labour. Displacement
of labour in these sectors might cause considerable social unrest.
There is utmost importance to have a coherent and integrated services policy
which is analogous to the industrial policy and agricultural policy resulting in systematic
reforms in different services. Liberalization has to be in a phased manner accompanied by
social policies in sectors that have surplus labour like retail and wholesale trade and
railways. Full gains of trade liberalization in services will follow only if certain economywide efforts are made to make the general environment more conducive to trade and
122 | P a g e
investments in services. Macroeconomic policies like high tariff rates, large fiscal
deficits, and rigid labour laws adversely affect the competitiveness of services. Economywide efforts to improve the business environment and removing domestic constraints
sustain the dynamism of India’s services sector.
Since the late 1980s much discussion has been taking place to assess whether the
service led growth of the Indian economy is sustainable or not. Bhattacharya and Mitra
(1990) stated that the deviation in growth rates of the three sectors may have negative
impact on inflation, balance of payments and income distribution. Since there are strong
linkages from services to industry the growth in manufacturing sector will give an
impetus to services. To enhance growth synergies among sectors relatively stronger
growth of services sector is undesirable as the input demand of services sector is industry
intensive rather than agriculture intensive (Kaur, Bordoloi and Rajesh 2009). Growth in
the manufacturing sector is also desirable for trade balance and employment generation
(Papola 2005). India must develop its manufacturing whose multiplier effect and impact
on job creation are significant to meet the challenges of demographic profile and reduce
poverty (Li & Yang, 2008).
One of the critical issues that have been discussed in the literature is the role
played by services in the growth process. Though, a forceful case is put forward that
services can become the major driving force of economic growth but in case of India the
sustainability of a service-led growth has been questioned by many (e.g., Mitra 1988,
Bhattacharya and Mitra 1990 and Arunachalam and Kumar 2002). It has been argued that
income from the service sector is growing much in excess of the demand generated for
services by the commodity sector and since income might grow faster than employment
in the organised services therefore service-led growth can have serious implications for
inflation, income distribution and balance of payments. It is argued that this growth is not
sustainable in the long run. This argument becomes stronger since economic theory
suggests that a decline in the share of agriculture sector and manufacturing sector is a
phenomenon that is generally associated with the growth process of a high-income
economy and not a developing country.
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To test the issue of sustainability of service-led growth in India Gordon and Gupta
(2004) attempts to find out whether India is an outlier in this case by using cross-country
data on sectoral shares in GDP and fitting a trend line. They find that the share of service
sector in GDP is associated positively with per capita income. The countries with higher
per capita income also have a larger share of services in GDP. In case of India they find
that in 1990 share of India’s service sector in GDP was very close to the average share
predicted by the linear relationship. By 2001 India’s share of services moved above the
average share by as much as 5 percentage points as a result of rapid growth of services in
India. In spite of this they do not find India to be an outlier at present. They argue that if
different sectors in India grow at the average growth rates experienced in 1996-2000 then
by 2010 the share of services would increase to 58 percent. This would bring size of
India’s services sector relative to GDP closer to that of an upper middle income country
even though India would still belong to the low income group.
Hansda (2001) addresses the issue of sustainability of service-led growth of India
in terms of inter-sectoral linkages as emanating from input-output tables for 1993-94 for
115 activities at the disaggregated level. The results indicate that while services and
agriculture do not share much inter-dependence. Industry is found to be most serviceintensive with 70% of its activities being direct services-intensive. The inter-sectoral
linkages are explored further by estimating Rasmussen indices of backward and forward
linkages. The indices show that service sector is more growth-inducing as compared to
other sectors in terms of backward and forward linkages. He therefore argues that growth
in service sector will induce growth in other sectors such as trade, transport and
construction. These sectors are found to have high domestic constraints and therefore
require immediate policy reforms. Adequate infrastructure facilities will not only enhance
the country’s attractiveness to foreign investment but will also improve competitiveness
of domestic investment. Since these sectors have large potential for generating
employment. Growth in these sectors will also help in resolving the dilemma of jobless
growth in the services sector. Most of these services still have considerable restrictions on
FDI limits. Emphasis should be now laid in improving growth of these services by
reducing external as well as domestic constraints, which have been identified by the
specialised studies.
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Some economists caution that if the service sector bypasses the industrial sector
then economic growth can be distorted. They say that service sector growth must be
supported by proportionate growth of the industrial sector; otherwise the service sector
growth will not be sustainable. It is true that in India the service sector’s contribution in
GDP has sharply risen. The service sector has grown at a higher rate than industry which
too has grown more or less in tandem. The rise of the service sector therefore does not
distort the economy. The issue of sustainability of services growth, i.e., whether the lack
of rise in the share of manufacturing sector and the corresponding shift to services is
sustainable or not is further examined by Banga and Goldar (2004). In this regard the
study estimates the impact of higher use of services input on productivity growth of
manufacturing sector. They construct a multilateral total factor productivity index for 41
major industry groups for the period 1980-81 to 1999-00. Regressing the total factor
productivity index on a set of explanatory variables including the ratio of services input
to employment, the study finds a positive relationship between use of services input and
industrial productivity. Their results show that the increase in use of services in
manufacturing in the 1990s has favourably affected productivity in the manufacturing
sector. In the light of this result the study argues that India’s service sector will be
successful in creating its own demand since higher use of services in the manufacturing
sector has not only lead to higher output growth in manufacturing sector but also
improved productivity in the manufacturing sector.
It can therefore be said that India’s experience with respect to service-led growth
may be unique but it cannot be regarded as an outlier as yet. Growth in services is found
to be growth inducing and has led to higher productivity in the manufacturing sector in
the 1990s and therefore it is possible for the service sector to sustain its growth.
However, more research is required in this field to reach to any firm conclusions. It is
emphasised that the ‘service economy’ is structurally different from economic system
from the previous era of mass industrial production but it is crucial to note that the
structural change does not necessarily imply that services become more important in final
consumption. Services become ever more crucial to co-ordinate and control production
processes of differentiated consumer products that are subject to economies of scale.
Increased expenditure on producer services also enhances the efficiency of production by
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allowing higher level of specialisation in production. It can be derived that services are
becoming more and more crucial to the growth process of an economy. They can not only
sustain their own growth process but can also improve the growth rate of manufacturing
sector by improving the efficiency of production.
Indian economy has been undergoing structural changes that generally
accompany economic development over a longer period since independence.
Acceleration in growth rate gave an impetus to these changes during the 1980’s and they
have taken place at a faster rate in the post‐reforms period. The major characteristics of
growth over the last three decades which distinguishes it from the experience of the
earlier three decades consist not only a significantly higher rate but also few other
important departures from the earlier pattern. Emergence of services as the major
contributor to growth in GDP and eventually as the predominant sector of the economy is
one such feature. Growing importance of the external sector with rapid growth both of
imports and exports is another feature. Decline in the share of agriculture in GDP, which
has been taking place in earlier decades as well took place at a much faster rate.
Employment content of growth has seen a steep decline during this period.
There is the question whether the growth with the current structural characteristics
will at all be sustainable in the medium and long run. It is commonly feared that
economic growth primarily derived from services may not be sustainable in a developing
country without attaining a significant degree of industrialisation. India has registered a
reasonably high growth over a rather long period primarily sustained by services growth.
Whether this could continue in future would depend on the composition of growing
services in terms of whether they contribute to the capacity of the economy to develop
especially in the commodity producing sectors of agriculture and industry.
Growth in services has led to higher use of services in manufacturing sector. This
has in turn led to higher output and productivity growth in the manufacturing sector
which implies that the service sector will be able to generate its own demand in the
future. Studies also show that the growing dynamism of India’s service sector is to a large
extent due to growing external markets for services and the gradual though partial
liberalisation of domestic economy. Most of the studies on the Indian economy support
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the view that domestic reforms and higher liberalisation in terms of lowering of barriers
to trade and allowing FDI have improved growth in the corresponding services. This
increased external demand may also play an important role in sustaining the dynamism of
services. To resolve the problem of lack of employment growth in services there is a need
to achieve uniformity in the growth of different services. This becomes even more
important if we consider the interdependency of different services. An important aspect
of services is the ability to generate sizable external economies or diseconomies that are
not reflected in the price signals. Also, closely linked is the problem of linkages, both
backward and forward, with the rest of the economy and with its growth rate.
Inefficiencies in services therefore can exert a multiplying effect on the economy as a
whole and efficiency in providing services can make a considerable difference to the
sectoral growth rates. For achieving higher efficiency in financial services like banking
and insurance we need efficient IT-related services.
One of the probable reasons for lopsided growth in services is the fact that
reforms in India at the sectoral level have evolved in an ad-hoc way. There has been no
coherent overall policy for services in line with the industrial policy and agricultural
policy. Consequently the depth and pace of reforms lack uniformity across sectors. Along
with the national and international efforts to liberalise trade India also needs to undertake
some domestic reforms like institutional and regulatory reforms so as to maximise the
benefits of higher trade and FDI in services.
Assessment of performance of India’s different services shows that there exists
some services which have low external barriers and high growth rate but these services
have not been able to enjoy a suitable share in India’s exports of services. We find that
health and education sectors have high potential for trade since they have low external
barriers and high growth rates. This indicates substantial domestic constraints in these
services.
With respect to slow growing services which have low share in exports like
professional services, legal, postal and accountancy etc. We find that these services have
restricted liberalisation. Both external and domestic constraints restrict growth in these
services. Some of the important external and domestic constraints that have been
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identified by specialised studies and which need to be removed are: With respect to legal
services, many of the domestic policies need to be altered. For example, the Indian law
which prohibits formation of partnership with enrolled professionals of foreign countries
in legal services limits the scope for an Indian firm to build its capacity to advice on
foreign law or international law or in a newly developed area. This needs to be suitably
altered. Prohibition on partnership with multi-disciplinary knowledge prevents capacity
building in areas where technology progresses beyond comprehension of lawyer.
Restrictions on joint ventures or establishment of firms in India by foreigners should
therefore be relaxed but since this would be a major reform strategically it would be
better to delay it by few years. In accountancy services, India does not yet have large
firms with international visibility. There is a need to embrace international accounting
standards and reporting requirements. The process of adoption should be treated as urgent
and concomitant changes should be undertaken in domestic statutory legislation.
Though there exists a strong case for trade liberalisation of services one should
not forget that growth is not the sole objective of an economy. Therefore social costs of
trade liberalisation of services should also be considered. For the Indian economy this
issue becomes even more relevant given the employment dimension of services sector.
Services sector in 1999-2000 employed almost 68 percent of urban employment. One of
the arguments that is put forward against trade liberalisation is displacement of labour
towards sectors where an economy has competitive advantage. However some of the
services sectors that have traditionally been under public sector like railways, postal
services etc. are saddled with excessive labour and higher trade liberalisation in these
sectors might result in large displacements of labour. Similar concerns are also found in
sectors like retail distribution sector that employs large number of unskilled labour.
Displacement of labour in these sectors might cause lot of social unrest. Trade
liberalisation in these sectors therefore must be undertaken in a phased manner
accompanied by appropriate policies to curb unemployment. Thus trade liberalisation
policies have to be supported by complementary social policies so as to avoid substantial
social costs that might undermine the support for reforms.
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Limited empirical research exists in the area of services in India. What remains
the biggest hurdle in future research on trade and investment in services is the lack of
reliable, timely and easily interpretable data. The data that is more widely available do
not currently encompass all forms of trade in services, in particular intra-firm trade in
services is not recorded. What is required is trade data on services at a more
disaggregated level which is consistent with value-added and employment data and is
comparable across time. Efforts should therefore be made to develop a suitable database
for furthering empirical research in this field.
There is a dire need to formulate an Index of Services in order to have a coherent
policy on services. Appropriate measures to estimate output in services need to be
identified and by attaching suitable weights to disaggregated services, index for services
can be formulated. Given the heterogeneity of services formulation of separate indices
can also be considered. Along with the above policy insights it must be kept in mind that
full gains of trade liberalisation in services can be acquired by an economy only if certain
economy-wide efforts are made to make general environment more conducive to trade
and investments in services. Macroeconomic policies like high tariff rates, large fiscal
deficits and rigid labour laws may have as adverse effect on competitiveness of services
as on goods. Excessive regulations, discretion in the allocation of licenses and permits,
corruption and poor quality of infrastructure could adversely affect the growth of services
sector. Studies have shown that business environment in India is not very competitive as
compared to other developing countries (Dollar and Goswami 2002). The regulatory and
administrative burdens are considerably high and so are the labour market restrictions.
This points to the need for regulation in services which arises primarily from market
failures attributable to natural monopoly and inadequate consumer information. Strong
and financially independent regulators and economy-wide efforts to improve business
environment can go a long way to sustain the dynamism of India’s services sector.
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Chapter-VIII
CONCLUSION
The trends in regional disparities in India over a period of 30 years have been
examined and there are wide variations in economic performances of states and the
differences have only increased over time. Economic reforms have not delivered on
employment front as much as they have delivered on the GDP front. Level of change in
employment has not been as large as in GDP. Services have increased their share in GDP
from 36 percent in 1972-73 to 45 percent in 1993-94. It further rose to 59 percent in
2009-10 but the corresponding increase in employment share has been much slower from
15 percent in 1972-73 to 21 percent in 1993-94 and to 27 percent in 2009-10.
Continuation of this pattern of structural changes has serious implications not only for
equity but also for the sustainability of a high growth rate as well. Growth of services
sector has been more uneven and has been generally higher in the better developed states,
particularly during 2000s thus resulting in increasing divergence among states in their
levels of economic development. The rise in regional inequality during the 1990s and
2000s is largely due to a sharp rise in inequality in the services sectors. The rising relative
size and interlink ages of services sectors with the economy also contributed to rising
inequality in this period. In the absence of adequate growth in other sectors of the
economy, the services sector in the long run would be adversely affected by demand
constraints and its performance would then depend upon the uncertainly in demand from
the rest of the world through exports. The process of growth is accompanied by dual skill
over effects i.e. growth in manufacturing sector improves growth in service sector since it
creates additional demand for services which arises due to structural changes that makes
contracting out cheaper and more efficient for manufacturing sector's growth. Services
sector, in turn leads to higher growth in manufacturing sector since it to leads to higher
demand for new products and brings about improvement in productivity of
manufacturing sector. Also as production of services requires inputs from other sectors,
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there could be supply constraints due to slowdown in the growth of productive capacity
in the rest of the economy.
It is found that inter-state disparities in rates of GSDP growth increased during the
1990s over 1980s. In the period after 2000 while some of the poorer state have
experienced a faster than average growth but growth of some of the developed states has
slowed down during this period. Although it is still much higher than it was before the
reforms. Inter-state variations in rates of GSDP growth are found to be strongly
associated with the pace of services growth during 1980 to 2010. A high aggregate
growth rate is generally accompanied by increasing disparity. A deregulated policy
regime can lead to an increase in disparities as the developed regions have a competitive
advantage and government policies favouring poorer regions are no longer in operation
on the one hand while on the other hand disparities may also decline as the regions get
opportunities to freely utilise their comparative advantage.
Accelerating economic growth is closely linked to growth in service sector of the
Indian economy at the present juncture is receiving greater attention. It is therefore very
important for an economy to provide services as efficiently as possible and this may
require not only increasing investments in services but also continuously improving on
them through improved technology and many of the developing countries that are
undertaking domestic reforms in their service sector and liberalising services do not have
a well integrated policy for the sector. The opportunities in this fast growing
employment-oriented, FDI attracting sector, with vast export-potential are striking.
Keeping in mind the importance of services in the growth process, it is essential to have a
well-defined service policy in line with agriculture and industrial policies. Reforms in
services should therefore be an outcome of well-integrated policy for services and should
be undertaken in segmental manner maintaining the balance between growth of different
services sector because the sustainability of a relatively high GDP growth of the recent
years driven by growth of the services sector alone would be difficult to maintain over a
long horizon.
The Indian states had strong tendencies to diverge in per capita income over the
period. An important finding is that the rate of divergence has increased considerably
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during the post-reform period relative to the pre-reform one. This signifies that the ongoing economic reforms since 1991 have led to an increase in the regional disparities in
income. The states were moving only towards their differing steady-state income levels.
Hence it may be argued that the observed differences in per capita incomes have been
due to dispersion in the steady-state levels among the states, which was found to be due
to differences in production structures and physical, social and economic infrastructure
among them.
The results suggest that economic policy measures for improving physical, social
and economic infrastructure can have significant effect on long-run growth potential as
well as convergence across states. Since the observed divergence in per capita income
across the states have been due to variations in their steady-states targeting public
investment in infrastructure for the states with lower steady-state levels could improve
overall growth performance and reduce regional imbalance. Unless appropriate steps are
taken to correct disparities in the spread of infrastructure through regional policies and
inter-governmental transfers, divergence in per capita incomes across states will continue
to widen. The existing policy of transferring proportionately larger amount of funds to
relatively poorer states appears to be in the right direction. Efficient utilization of these
funds by the states for infrastructural development could help in a great way to improve
their overall growth performance and reduce regional disparities in development. The ongoing economic reforms that have led to an increase in regional disparities in income
need appropriate modification if the policy makers are really interested in reducing
regional disparities in development in the country.
The acceleration in the growth of the services sector in India was due to fast
growth in communications, banking services, business service, IT and community
services. The remaining sectors grew at a constant or trend growth rate. The challenges in
this area are to retain India's competitiveness in those sectors where it has already made a
mark such as IT and ITES and Telecommunications. Their deeper and broader use in the
domestic sectors would also have potential to increase the efficiency and productivity of
other goods and services. The globally traded services such as financial services, health
care, education accountancy and other business services, where India has a large
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domestic market but only a very small part of the full potential has been tapped so far.
Regulatory improvements will also be important as many domestic regulations and
market access barriers could come in the way of fully tapping this growth accelerating
sector. The challenges also lies in making inroads into some traditional areas such as
tourism and shipping where other countries have already established themselves but
where the potential for India is nevertheless very high.
Since there are diverse sectors within services, the issues and policies cannot be
separated into water tight compartment. These challenges and issues could further
strengthen the services sector which is the driving force for India to realize double digit
growth potential both overall and at state level, while providing more and better job to
help achieve more inclusive and balanced growth.
Services are looked at sceptically in our country and it is claimed that they are no
more than add on to manufacturing. This conventional attitude needs to be changed for
good. In the US the share of manufacturing in GDP is around 23 per cent and share of
services is more than 70 per cent. It is also reflected in employment pattern. Future
investment and job creation in India will not be driven mainly by manufacturing. Indeed
manufacturing may yield relatively few jobs in our country. Its result being companies
can triple production without hiring a single new worker but a huge number of jobs will
be created in service industries. It will also soak up the bulk of investment.
There are some universal trends in employment patterns which we cannot afford
to ignore. Newer technologies will need fewer people in manufacturing. On the other
hand more jobs will be created in services, sub-contracting and unorganized sector.
Traditional trade demarcations may not have the same place in a modern economy.
Flexibility in operations is needed and knowledge will be required for employees. There
is no doubt that a large number of illiterate and semi-literate workers in our industry will
face problems as a result of it. There will be increase in the requirement of part time and
temporary workers. Activities will get specialized and a large number of specialized
vendors and sub-contractors will constitute manufacturing networks. As location of
industries will no longer be decided by the government and will be based on economic
choices so employees will have to be prepared for relocation.
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Industry clusters will emerge and all areas will not get equal investment or equal
job opportunities. Indian industrialists will be very unwise to focus on manufacturing
alone in given scenario. Government needs to shift its thinking to create institutional
structures that encourage private investment in services and remove road blocks and
delays. These steps will create far more jobs than public sector investment.
In response to the declining share of agriculture in national income, a shift in the
occupation of the rural population away from agriculture and towards those sectors that
are growing most rapidly will have to be encouraged. Such an occupational shift from
agriculture to services has already started. But the proportion of the work force in
agriculture is still far greater than the proportion of agriculture in the national income.
Obviously, greater attention is to be paid in managing the shift from an agricultural
economy to one that is dominated by services. The growth of services such as those
related to tourism or transport in the rural areas can be supported by families who find the
returns from agriculture inadequate. Steps would have to be taken to increase the
potential of the rural population to benefit from the growth of services. The handicap of
an inadequate awareness of technology would need to be overcome by not only
increasing the availability of education in rural areas but also ensuring that it overcomes
the requirements of modern services. Effective instruments will also need to be created to
pool rural capital so as to enable investment in high technology services, including
linking up directly with global financial and communication networks. Such a transition
may not be very smooth but certainly not impossible if preferred steps are undertaken
with a vision for future development.
The study bears several important policy implications in designing an appropriate
growth strategy. It highlights that the sustainability of a relatively high GDP growth in
recent years driven by growth of the services sector alone would be difficult to maintain
over a long horizon. This is because in the absence of adequate growth in other sectors of
the economy, the services sector in the long run would be adversely affected by demand
constraints and its performance would then depend upon the uncertainty in demand from
the rest of the world through exports. Also, as production of services requires input from
other sectors, there could be supply constraints due to slow down in the growth of
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production capacity in the rest of the economy (Rakshit 2000). Storm (1997) arrives at a
similar conclusion that if a step up in manufacturing exports is to contribute to noninflationary acceleration of GDP growth; it needs to be supplemented by adequate
policies aimed at raising agricultural output.
A critical problem facing India’s economy is the sharp and growing regional
variations among India’s different states in terms of poverty, availability of infrastructure
and socio-economic development. Four low-income states namely Bihar, Madhya
Pradesh, Odisha and Uttar Pradesh are more than one third of India’s population. Severe
disparities exist among states in terms of income, literacy rates, life expectancy and living
conditions.
The five-year plans, especially in the pre-liberalization era attempted to reduce
regional disparities by encouraging industrial development in the interior regions and
distributing industries across states but the results have not been very encouraging since
these measures. It in fact increased inefficiency and hampered effective industrial growth.
After liberalization, the more advanced states have been better placed to benefit from
them, with well developed infrastructure and an educated and skilled work force which
attract the manufacturing and service sectors. The governments of backward regions are
trying to reduce disparities by offering tax holdings, cheap land and focusing more on
sectors like tourism which although being geographically and historically determined can
become a source of growth and develops faster than other sectors.
The government should take steps to develop the informal segment especially that
in the tertiary sector as in the Report of Special Group on Employment Generation 2002.
In 1999-2000 only 8.34 per cent of the total labour force was employed in the organized
sector and the remaining 91.66 per cent was absorbed in the unorganized sector. Besides
it there is sufficient empirical evidence which indicates that a large segment of informal
sector workers are employed in tertiary activities. As Mitra’s (1994) study shows, in
around 70 per cent of the Class I cities i.e. each with a population of 1,00,000 and above,
tertiary activities accounted for more than 60 per cent of the informal sector. Further
Hemmer and Mannel (1989) and Sithuraman (1981) also found that 75 per cent of the
informal sector was located in tertiary activities by adopting sector specific strategies
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because employment generation through this sector is also the least cost option (ILO
1991).
If the services sector is properly developed along with the other two important
and basic sectors the existing strong complementarily amongst the three sectors will
increase in the near future, it can become instrumental in employment generation and
individual prosperity as it combines the multiple sectors of technology and manufacture.
The introduction of newer technologies necessitates skill up gradation in all three sectors,
which would further accelerate the growth of the services sector. The agriculture sector
might witness more intense use of IT than what it is doing now, be it in the use of remote
sensing through satellite for regular monitoring of crops, social conditions, water
resources, weather forecasts through satellites and ground borne systems or in the use of
modern communications to be in contact with markets. Similarly in the industrial sector
the reorientation of skills from a lower to a higher level will became almost a necessity
with the use of sensors, modern electronics and IT. Consequently the growth of skilled
and professional services would alleviate the acute problem of the educated unemployed.
Former President Abdul Kalam and YS Rajan (1998) highlight the complementarity of
the three sectors in the following words:“A country like India cannot hope to build its future on the services sector alone
though it can be and will be a major component of the economy. India cannot afford not
to build its strengths in agriculture for reasons of food and nutritional security nor can it
afford to ignore manufacturing strengths for reason of economic and national security.
Based on the strength of these two sectors it can build a major economic infrastructure
for the services sector and use it to generate great wealth and employment for her
people.”
In India the distribution of natural resources has itself created large severely
underdeveloped regions in the country which have been recently brought into sharp
focus. The problem needs to be addressed by well thought out strategies including
deliberate transfer of resources to underdeveloped regions. This is vital because proper
grants of all regions of the country are essential for its prosperity in terms of political and
social systems and for the economic viability of the nation itself.
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Like other developing countries India also suffers from the acute and explosive
problem of regional imbalances. The first three Five Year Plans were directed towards
achieving the objective of higher growth rates. Scarcity of resources and efficiency of
investment often made it imperative for decision makers to concentrate developmental
efforts in those segments of the economy and those regions of the country where the rates
of return were expected to be high. This type of implementation of planned development
programmes resulted in widening regional imbalances in the levels of development and in
strengthening of the dualistic structure of economy.
Despite robust economic growth, India continues to face many major problems.
The recent economic development has widened the economic inequality across the
country. Despite sustained high economic growth rate approximately 80% of its
population lives on less than $2 a day (PPP). Even though the arrival of Green Revolution
brought an end to famines in India and 40% children under the age of three are
underweight and a third of all men and women suffer from chronic energy deficiency.
Organized retail has the potential for reducing inefficiencies and improving the
productivity of the retail sector. Studies have shown that in the US, organized retail
contributed one-fourth of the rise in productivity growth in the period 1995–99. However,
in India organized retail is less than 4% of the total retail sector. It is expected that
organized retail by forming linkages with the agriculture sector can lead to productivity
growth. Working with organized retail can encourage farmers to improve yields by
enabling them to obtain quality supplies, adopt superior farm technology and practices,
access timely credit at reasonable rates and bypass unproductive intermediaries. The tieup with organized retail may drive small/medium enterprises to become more efficient in
order to meet the stringent delivery conditions of the retail market.
Private labelling is the creation of brands in the name of modern retailers, and it
has already begun in India in the food and grocery and apparel segments and is expected
to expand rapidly. Small-scale manufacturers will be the major beneficiaries of private
labels. Retail services, if they become more organized have the potential for improving
not only their own productivity but also the productivity of other sectors especially
agriculture, which is marked by low productivity growth. In order to increase the size of
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the organized sector and to encourage people to shift from unorganized retailing to
organized retailing, the following policy directions should be considered: The retail sector in India is severely constrained by the limited availability of
bank finance. Suitable lending policies need to be designed that will enable
retailers in the unorganized sectors to expand, employ better technology, and
improve efficiencies. Policies that encourage unorganized sector retailers to
migrate to the organized sector by investing in space and equipment should be
encouraged.
 The government must actively encourage the setting up of co-operative stores to
procure and stock commodities from small producers. This will address the dual
problem of limited promotion and marketing ability, as well as market
penetration, for the retailer. The government can also facilitate the setting up of
warehousing units and cold chains, thereby lowering capital costs for small
retailers.
 With 3.6 million shops retailing food and employing 4% of the total workforce,
the food-retailing segment presents a focused opportunity for the government to
catalyze growth and employment. Provision of training in handling, storing,
transporting, grading, sorting, maintaining hygiene standards, maintaining
refrigeration equipment, packing, etc. is an area where the government can play a
proactive role. This could give a substantial boost to the productivity of this
sector.
 Quality regulation, certification, and price administration bodies should be created
at district and lower levels for the upgrade of the technical and human interface in
the rural to urban supply chain.
 Competition generates productivity. Calibrated and gradual exposure to
competition may lead to productivity spill over effects as domestic organized
retailers learn ways of building effective supply chains from the foreign retailers.
Some competition has already been induced by the government by allowing entry
to foreign firms selling single-brand products. However, domestic organized
retailers need to acquire a threshold size to have productivity gains from
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competition. Incentives to increase the size of domestic retail firms need to be
designed.
To sustain the growth of software services, targeted policies and strategies are
needed. The sector is already at the frontier of the world and there is a need to capitalize
on the gains that growing domestic and external demands offer. The following are some
recommendations for sustained improvements for productivity growth: With the changing global situation, especially after the slowdown in the growth
rate of advanced countries, the nature of demand for software services (especially
IT-BPO) has also begun to change. A recent National Association of Software
and Services Companies–Everest research report shows that the outsourcing
needs of buyers are changing with companies focusing on value drivers
(integrated delivery models offering scale and value and speedy implementation),
minimizing risks, and re-evaluating the sourcing model (re-thinking captive
versus supplier mix, evolving risk-reward relationships with vendors, and opting
for outcome-based pricing). It is important for IT-BPO services providers to build
a strong and unmatched value proposition for themselves in specific, focused,
niche segments. Super-specialization segments now need to be explored. Policy
incentives need to be built for encouraging IT-BPO services to enter such
specialty segments.
 IT-BPO services are not only increasing their depth by entering super-specialty
segments, they are also increasing in width by bringing new areas into their ambit,
e.g., legal process outsourcing, clinical research outsourcing, mobile applications,
energy efficiency, and climate change. These are new areas that require massive
investments and knowledge creation. It is recommended that the government
takes initiative and encourages IT firms to enter these areas by creating policy
incentives.
 Along with entering new segments and climbing up the value-chain, what is also
needed for the sustained productivity growth of the sector is innovation. In line
with providing incentives for R&D activities for the manufacturing sector, the
government should also focus on developing incentives for innovations in IT
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services. Collaborative research between industry, academia, and government
needs to be encouraged.
 The government can give direct support through greater outsourcing and moving
away from low-value, high-volume back-office jobs and customer support
activities, and instead moving towards higher value offerings by BPO services
providers. The government role in expanding the domestic BPO industry is
expected to be critical, as it can boost domestic business by taking forward
programs such as e-governance and connectivity. This will further increase the
growth of the domestic market and inject productivity growth into the economy.
 The Indian software services sector has the potential to emerge as an IT hub in the
region. But for that to happen, it is important for the government to provide
opportunities within its various bilateral Free Trade Agreements. Concessions for
IT service providers can be negotiated to increase exports and investments in
other countries. Low-value end services can be outsourced to these countries and
attempts can be made to develop supply chains.
Efforts are required to improve both demand-side and supply-side factors in these
services sectors. On the demand side specific policies are required to improve domestic
and external demand, and on the supply side targeted policies are required to boost
productivity growth.
Higher sustainable growth is creating greater demand for financial savings. The
Indian banking sector faces many challenges with the economy possessing one of the
highest growth rates in the world. Not only does the banking sector require increased
penetration to reach out to a wider customer base but it also has to provide the best value
to customers in terms of service levels and transparency. Indian banks will have to find
ways to optimize each customer relationship as they compete with global players with
deep pockets and deep customer insights. To help banks improve their productivity and
efficiency and provide much needed support to the industry, recommendations are the
following: Banks not only need to invest in infrastructure but they also need to leverage
information technology to find more innovative ways to reach customers, such as
140 | P a g e
utilizing new delivery mechanisms, economizing on transaction costs, and
providing better access to the under-served. Electronic transactions substantially
improve the efficiency of banking systems because they are faster in comparison
with paper-based transactions. To help banks undertake these costs, more
deregulation is required.
 Another critical challenge is the hiring and retaining of talent in the face of stiff
competition from private institutions. Banks will also have to invest in new skill
development and training. The government can provide vital support in this
respect. As the share of public-sector banks is the highest, skill development and
training of staff needs to be undertaken at regular intervals to keep them up-todate with the latest technologies and customer care programs.
 Indian banks need to build on existing capabilities and also add new ones. This
poses a more serious managerial challenge given the dynamic environment in
which banks will be forced to continuously learn and reorient themselves while
adopting new technologies for risk management, building innovative service
mechanisms of delivery, and improving customer care. The consolidation of
banks can prove to be an effective tool to achieve this objective. Banks with
similar operations have an incentive to merge, thereby eliminating overlapping
branches and freeing back office, administration, and marketing resources.
Productivity gains from the implementation of new technologies would also be
enhanced due to the incurring of large initial investments compared to the scale of
operations. This may also lead to risk diversification, which is more relevant for
smaller banks concentrated in particular regions serving niche markets. As banks
merge and grow bigger they would be in a much better position to introduce
customized financial instruments. The government can play a vital role in this
through strategic policy intervention.
A clear danger is that the current pattern of skill-intensive growth will be
accentuated. Increasing inequality of income is paralleled by increasing regional
inequality. These trends can create political instability, or lead to growth that peters out,
leaving a wealthy class connected with the global market economy, and significant
numbers of poor people.
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One of the features of the Indian development model was its ability to balance
different interests through formal democratic processes as well as informal political
bargaining, albeit at the cost of higher growth. The challenge now is to create a new
social contract that softens the growth-equity trade-off so that both can be better
achieved. As has been the case for a long time in India, social stratification does act as an
inhibitor to equity. Many of the poorest parts of India with the worst human development
indicators have high proportions of tribals or dalits (former untouchables). Interestingly,
the software industry provides an example of what is possible. Initially, the view of
computer science as a cerebral activity with high social status made it attractive for upper
castes in India, especially in the South, where quota systems had restricted access to
government jobs for the highest castes. Over time, however, the industry has attracted
entrants from all backgrounds. Global competition has promoted a meritocratic relatively
egalitarian culture in the industry. Women too are increasingly drawn into a specialty that
does not suffer from the traditional social constraints associated with other disciplines
such as civil and mechanical engineering. In general growth and urbanization have begun
to chip away at traditional manifestations of social stratification. It will be important for
policies to be designed that improve access to education through targeted subsidies and
supply increases, rather than increased use of quotas.
Agriculture remains one of the biggest challenges for India’s future development
though it must be recognized that agricultural modernization cannot be a substitute for
growth in labour-intensive manufacturing. After the diffusion of the Green Revolution
which introduced high-yielding varieties of several cereal crops along with increased
fertilizer use and irrigation agricultural growth has slowed. Part of the problem is that
farmers have been locked into growing low-value crops by the existing physical and
organizational infrastructure and political arrangements. New investments are required
throughout the agricultural value chain but these also require innovations in risk
management and adjustment assistance that have been slow to develop especially for
agricultural producers.
Individual bureaucrats, visionary entrepreneurs and enterprising politicians
together played a role in previous agricultural development as did foreign expertise
142 | P a g e
(Kohli and Singh, 2005). Clearly a concerted approach to revamping this dimension of
development strategy is required for India. Many of the changes required have to do with
relaxation of controls but others require institution building which is more difficult.
Improvements in agricultural growth and rural development more broadly will
address some of the concerns with respect to inequality and have a value from that
perspective as well. While rural development through road building, better
telecommunications connections and investments in health and education can help to
create non-agricultural rural employment but it remains the case that urban, industrial
employment must increase dramatically. As agricultural productivity increases labour
will be freed up and must be absorbed into industry and services. Given the limitations of
services as an employer of unskilled labour, Indian policy reform must be geared toward
creating the conditions for large-scale labour-intensive manufacturing for the domestic as
well as the international market. This may be the single most important change needed in
India, for sustained growth – it represents a very traditional but logically sound goal for
development strategy. The problem has been in agreeing on and implementing a set of
policies that will support this goal. Microeconomic reforms of labour markets, smallbusiness finance, industrial and vocational training and land use policies are all likely to
be needed (e.g., Kelkar, 1999; Srinivasan, 2007; Panagariya, 2008. The urgency of
creating job-friendly growth is highlighted by India’s demographic dividend which will
give it a bulge in the working-age population.
To the extent services growth is led by sectors like transport and communication a
relatively large subsector of services it can sustain high overall growth in the medium
term. In the long run however the infrastructure services would have to induce faster
growth in industry to sustain a high aggregate growth.
There are inequalities arising out of occupation and location specificities which
have also increased. The share of agriculture has substantially declined in GDP but not in
workforce, so agriculture non‐agriculture disparity in per worker income has sharply
increased. Incomes of wage earners have grown at much slower rate than of the owner of
capital. Rising share of the organised sector in output but not in employment has further
widened the already large income disparities between those engaged in the two sectors.
143 | P a g e
Inter regional disparities in spite of some poorer regions doing better lately
continue to be large. Increasing disparities are no doubt likely to be a source of social
discord but will also threaten the sustainability of high economic growth as increasing
income inequality would result in a demand constraint.
It must also be noted that the high and increasing inequalities leading to growing
dualism for example between agriculture and other sectors and between organized and
unorganized sectors with large differences in productivity. It would also lead to supply
side constraints to growth in terms of availability of wage‐goods and inputs and
intermediates for production in the formal sector. Increasing asymmetry between income
and employment shares of agriculture is likely to pose a serious problem for growth as
well as livelihoods. If the continuing decline in the share of agriculture in GDP is not
accompanied by a significant decline in workforce share, it will not only lead to widening
of disparities and stagnation in purchasing power with large mass of rural population, but
can even lead to an absolute decline in incomes of agricultural workers if agricultural
growth is negligible or negative. Raising agricultural growth and productivity is no doubt
very important but the need to shift a large part of agricultural workforce to
non‐agricultural activities is rather urgent.
Linked with the structural transformation of workforce is the larger issue of
employment. The post‐reform economic growth has failed to deliver on employment
front inspite of its being highly successful in delivering on GDP front. A high growth has
not been able to generate employment even at a rate achieved with less than half GDP
growth rate in the past. Part of the reason lies in technology which has become less
employment intensive across economic activities and product groups but a good part of
the reason lies in the structure of growth.
Most services especially those which have dominated India’s economic growth in
recent years are highly capital intensive and India’s exports have become increasingly
less labour intensive because of the compulsions of international competitiveness to use
more efficient capital intensive technology. Most growth has been derived from sectors
and activities that have low employment potential. A service‐led and export‐led growth is
highly unlikely to improve the employment intensity. A faster growth of the
144 | P a g e
manufacturing industry along with a greater domestic orientation of production is
therefore necessary for growth to ensure a reasonably high rate of employment growth.
A scheme has been launched for development of nationally and internationally
important destinations and circuits through mega projects. So far 38 projects have been
identified out of which 23 have been sanctioned. The mega projects are a judicious mix
of heritage and cultural, spiritual, and ecotourism in order to give tourists a holistic
experience. In order to meet the huge skill gap in the hospitality industry the Government
has put in place a multipronged strategy which includes strengthening and expanding the
institutional infrastructure for training and education.
Besides this other steps are being taken for skill training of youth in the
hospitality sector and providing skill certification. While the general security situation
has improved considerably. To strengthen the National Tourism Policy 2002’s critical
pillar of Safety the Government has adopted the Code of Conduct for ‘Safe and
Honourable Tourism’ on 1 July 2010.
Along with the continuation of promotional efforts under the Incredible India
campaign the Government has introduced the Visa-on-Arrival (VoA) scheme for tourists
from five countries namely Singapore, Finland, New Zealand, Luxembourg, and Japan on
a pilot basis with effect from 1 January 2010. During January–December 2010, a total of
6549 VoAs were issued under this scheme. The VoA scheme has been extended to the
nationals of Cambodia, Vietnam, Laos, and Philippines with effect from 1 January 2011
and Myanmar and Indonesia from 25 January 2011. Despite these efforts there is a lot
more to be done given the potential of this sector. In fact at 11.5 per cent the share of
travel in India’s exports of commercial services in 2008 is relatively lower than that of
many other exporters of services and half the shares of the USA, EU and China
Some issues related to the warehousing sector include increasing high quality
storage capacity as well as the numbers of trained samplers and graders addressing issues
like:-
145 | P a g e
 Storage loss due to deterioration of the produce during storage.
 Lack of provision for dealing with cases where stocks are pledged with banks
and the depositor either absconds or refuses to take delivery.
 Delay in delivery and deposit of stocks due to extension of ‘no-entry’ zones in
cities.
 Levy of property tax on warehouses and high fees by ports.
The National Housing Bank (NHB) established with the objective of promoting
housing finance institutions both at local and regional levels has conceptualized the
reverse mortgage loan product exclusively for covering house-owning senior citizens. It
has introduced the residential real estate price index (RESIDEX), which is an initiative
towards providing the housing finance sector with an index which reflects the trends in
the prices of residential properties across the country.
The global economic crisis impacted the Indian real estate industry significantly.
However, various measures taken by the Government to boost the demand for residential
properties as also the relaxation in provisioning requirements by the RBI for banks and
NHB for Housing Finance Companies (HFCs) has minimized the impact of economic
crisis on this sector. The sector has started recovering following the increasing activity in
the Indian economy however with a fundamental difference. Customers are now going
for need- based purchases rather than investment based on the euphoria and hype
witnessed in 2007 and 2008.
The Government has been supporting the IT and ITES sector in many ways. This
was continued in the 2010-11 Budget with policies like Government expenditure for
improving IT infrastructure and delivery mechanism reduction in surcharge from 10 per
cent to 7.5 per cent for IT companies and Government’s E-Governance plan. There are
some issues in the IT-ITES sector which need attention. These include shifting from lowend services to high- end services like programming in the light of competition in BPO
from other countries and policies in some developed countries like UK to employ locals
addressing data protection issues as half of offshore work does not come to India
concluding totalization agreements with target countries to resolve the social security
146 | P a g e
benefits issue as is being done now and increasing the coverage and depth of IT and ITES
services in the domestic sector.
There is need to tap outsourcing in niche areas like actuarial and accountancy
services as there is good scope for outsourcing actuarial services and accountancy
services to India including setting up back offices. But Indian service providers need
high-quality training in tax laws of US and other countries besides laws related to
insurance, pension, etc. Tie-ups to overcome the weakness of small size of domestic
accountancy firms can also help India’s accounting sector grow manifold.
Some initiatives that could be taken in the construction sector include using the
standard contract document for all domestic civil engineering projects, setting up
consortiums to bid effectively for international projects and resolving the issue of
precondition in most of the overseas tenders floated by clients wherein equipment to be
supplied by the contracting company has necessarily to be sourced from an approved list
of suppliers from developed countries. Another area that needs consideration is the
possibility of a double guarantee avoidance treaty on the lines of the double taxation
avoidance treaty as overseas clients insist on bank guarantees to be issued under the
contract being routed through a local bank operating in the country of project execution
which results in Indian contracting companies being called upon to pay the bank
guarantee charges to Indian banks as also to the local overseas banks which issue the
final end guarantees to the client, based on the counter guarantees from the Indian banks.
Given the myriad activities in services supporting its growth will require careful
and differentiated strategies. The opportunities in this fast-growing, employmentoriented, FDI attracting sector with vast export-potential are striking. However there are
many challenges: One of the challenges in this area is to retain India’s competitiveness in those
sectors where it has already made a mark such as IT & ITES and
Telecommunications. Their deeper and broader use in the domestic sectors would
also have a dramatic potential to increase the efficiency and productivity of other
goods and services.
147 | P a g e
 The second challenge lies in making inroads into some traditional areas such as
tourism and shipping where other countries have already established them but the
potential for India is nevertheless very high.
 The third challenge is in making forays into globally traded services in still niche
areas for India, such as financial services, health care, education, accountancy,
and other business services where India has a large domestic market and has also
shown recent signs of making a dent in the international market, but only a very
small part of the full potential has been tapped.
There are also challenges related to collecting better data and developing a better
co-ordinated strategy to pull together all the dispersed information. Regulatory
improvements will also be important as many domestic regulations and market access
barriers could come in the way of fully tapping this growth- accelerating sector. Since
there are diverse sectors within services, the issues and policies cannot be separated into
watertight compartments. Addressing these challenges and issues could further strengthen
the services sector which is the driving force for India to realize double-digit growth
potential, both overall and at state level, while providing more and better jobs to help
achieve more inclusive and balanced growth.
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