On The Question of ‘Engine of Growth’
Sanjay Roy
Since the past three decades policy makers in India and across the developing world had been grappling with the problem of identifying the appropriate ‘engine of growth’ for future development. A recent report by the NITI Aayog seems to propose a double engine of manufacturing and services. There had been contesting views as to what ought to be the real engine in a country which has a per capita income falling within the low-middle income group although India ranks at the top of this group. It is an important question to those who believe that structures of economy matter and free functioning of market may not on its own uplift a developing country to a developed one. The peddlers of free market logic and advocates of neoliberal policies had surrendered the whole arsenal of industrial policy in the three decades of reforms with the ideological belief that opening markets for free flow of capital will ensure convergence in development levels across countries over time. The argument that gained currency is that capital will move from countries where returns are low to economies with high returns and therefore capital scarce developing countries are likely to get advantage in this process. This inflow of capital enables these countries to employ huge number of unused labour force since capital would prefer to invest in countries that are repositories of cheap labour and natural resources. This happened with a massive relocation of manufacturing in the developing South, although global South is not homogeneous, and the biggest gain of this relocation has been realised by China who didn’t follow the rules of free market. For most of the countries in the developing world the outcome was premature deindustrialisation with rising import intensity in almost every sector, and the inflow of foreign capital lost its steam over time. Moreover, instead of convergence of prosperity between Global North and South, for the working class it turned out to be a convergence in the opposite direction - of declining share of wages in GDP - and within country inequality, both in terms of income and wealth, reached unprecedented levels. The governments in many countries are in a mood to acknowledge the fact that the outcome is in no way closer to what was expected and most of these countries’ growth is largely driven by expanding services growth instead of steady industrialisation.
Low-end Services Growth
Developed economies with high per capita incomes usually have higher share of services in GDP and employment and that is because of the changing nature of demand with rising incomes. At low-income levels larger part of income is spent for basic requirements of food and clothing and as income increases demand for manufactured goods increases and subsequently that of services. This is, of course, not a sequence in which stages are very well defined and separated. There would be overlaps, but the proportional share of agricultural goods, manufactured goods and services in consumption expenditure changes over time. Hence, the share of agriculture is expected to decline in GDP and the relative shares of manufacturing value added and services are likely to increase. In most countries the share of manufacturing in GDP shows a decline. Most importantly the share of services in total employment also surpasses the share of manufacturing. In India the decadal average share of manufacturing in GDP in the recent decade is 17.8 per cent and that of services is 56.2 per cent while agriculture has come down to 16 per cent. The share of these sectors in total employment is roughly 11.3 per cent in manufacturing, 32 per cent in services and 44.7 per cent in agriculture and allied activities. This indicates that more than half of India’s GDP and one-third of employment comes from services. Agriculture and allied sectors still provide the largest share of employment, but its share has substantially declined from 64 per cent to 44 per cent in the past three decades. This precisely shows that a large portion of people have shifted from agricultural occupations and got absorbed in services.
Within services about half of the value added and more than 68 per cent of employment is accounted by four sectors namely trade, hotels and restaurants, transport and storage, and other services. The share of post and telecommunications, business services, financial services, education, health and social work together contribute less than 40 per cent of services value added and 26 per cent of employment. The latter group of services are of higher value added and the first group are mostly low-end services. Computer and Information services account for only 12.2 per cent of services GDP. Therefore, the larger part of services GDP comes from low-end services where labour productivity is low. Although sectors such as business service or financial service are growing fast but their share in total services GDP and employment is quite low.
This is not something very surprising. India being in the low-medium group of countries in terms of per capita income, the nature of service demand and hence the growth of services is also expected to be in the lower end of the services segment. And this is precisely the problem of service led growth in a low per capita income scenario. In services, the gap between income of one who is at the top of say, information technology services and the one who is involved in petty retail trade is much larger than the gaps that used to exist for similar comparisons in manufacturing or in agriculture. Therefore, when countries at a lower level of income per capita tilt towards service led growth, it is likely to generate greater income inequality. In developed economies people who leave industrial jobs are absorbed in services which generally show higher labour productivity. And in most of these countries there had been a shrinkage of agriculture and manufacturing both in terms of value added and employment. Hence, larger portion of the population are employed within services and as they are mostly engaged in medium-high value-added services, the relative impact on income inequality in these countries is low.
Missing the Real Engine
It is true that governments across the world, including the US and of course India, are once again bringing industrial policy back on the table. But it seems it is more about prioritising corporate interests and relying on big players without altering the structure of the economy. In terms of trade, what perhaps dominates is crude mercantilism or ‘beggar thy neighbour’ policy which has gone to the extent of weaponising trade relations. In such a scenario, building productive capabilities and strengthening domestic market is the appropriate choice for India. The real engine of the economy is demand to which investors respond to and allows producers to bet on large and long-term ventures. When the global demand is increasingly becoming uncertain in post-Trump era, augmenting and stabilising domestic demand could be the real stimulus for industry and services as well.
The issue is not about prioritising sectors. In today’s world, services are embedded in all manufacturing goods and they are mutually constituting each other. Hence, they would be increasingly dependent on each other. And in any case, services are employing the single largest share of workforce in India. More importantly, because of the increasing use of robotics and AI, both manufacturing and services will be employing a smaller number of workers per unit of capital invested in the future. Hence the income of the people has to increase faster which would generate demand for both goods and services. It is difficult to predict the relative importance of sectoral value added as new technologies are applied to production and distribution processes. Undoubtedly policies focussing on industry or services help in fast tracking competitive capabilities, but the moot point is demand for both high-valued manufacturing and services is restricted to a very small upper middle class and rich in India. Hence employment would also be trapped in the pit of informal manufacturing and low-end services. Also, since we didn’t have strategies to develop mass markets for standardised products even for the low value-added products India continues to be dependent on imports.
