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THE
NEW ECONOMY: SERVICES SECTOR
Short
Cut Not The Best Path
It
is to unravel the New Indian Economy powered by the surge in services
that India Today decided to devote this special issue to the economy.
The pages that follow bring out the ideas, the people, the businesses
and the government's role in India's New Economy.
The short
cut that the Indian economy has taken to services is not necessarily the
best path. Conventional economic theory divides economies into three broad
sectors: agriculture, industry and service. In the beginning all the economies
in the world were agriculture based. By the beginning of the 20th century,
the pulse of most rich economies had shifted from farms to factories.
The dominance of industry-as a source of income and jobs-lasted 50-80
years, before it was taken over by services.
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"The
rise of service is good but industry's failure to grow isn't."
Joydeep Mukherji
Director, S&P |
In India,
however, the age of industry never really arrived. The largest that industry
could grow was up to 22.7 per cent of the economy in 1997-98. Industry's
anaemic growth is particularly disturbing since most economic reforms
in the 1990s were aimed at strengthening India's industrial might. "India
has catapulted into services at a time when reforms were predominantly
focused on industry," observes economist and forecaster Surjit Bhalla.
Comments economist Bibek Debroy: "India has leapfrogged into services
more by default than design."
To many,
that is as disappointing as surprising. It reflects India's failure to
spread industrialisation, something that China has done so successfully.
Through its thriving industries (50 percent of the its economy), China
has been able to generate off-farm employment for millions of underemployed
in agriculture. That's what all rich countries have also done in the past.
In 1900, 32 per cent of the US population was employed in agriculture.
Today only 2 per cent work in this sector. "The growth of the services
sector is good, but the failure of the industry to grow is bad. It's not
a zero-sum game. There is room for both to grow," emphasises Joydeep
Mukherji, director for sovereign ratings in the New York-based Standard
and Poors and primary analyst for India.
The reasons
for the stunted industrial growth are too obvious to detail: the 40 years
of restrictive licence raj, a closed economy, anti-employment labour laws
and growth-inhibiting small-sector reservation.
No such
restrictions existed for services, which found a fertile ground to flourish
in India. For most hi-tech service industries (the clutch of information,
communication and entertainment businesses) the two ingredients of success
are labour and knowledge. Both are abundant in India at competitive prices.
Capital, the most scarce and expensive of all factors of production in
India, is least required in services. Bhalla is sure that the single most
important reason for Indian industry not being able to grow to its potential
is the high cost of capital. The bureaucracy's grip on services is less
stifling. It is easier to rent an office, hire a few employees on contract
and sell a service than to build a manufacturing facility.
No wonder
there are high hopes that services will breed a new class of entrepreneurs
in India. A class that will be more competitive, more innovative and more
global in outlook than some of the established industrialists of the day.
As Rajat Gupta, CEO of the US-based McKinsey & Company writes in his
column, the spirit of enterprise has kindled even in smaller towns like
Meerut, Siliguri and Pollachi.
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"Industry
Abroad is in much better position to use our IT skills."
Govind Rao
Chairman, Service tax panel |
The rise
in services also reflects progress in our tastes. Not so long ago people
used to spend time to save money. Now they spend money to save time. The
booming businesses of restaurants, bakers, caterers, fashion and entertainment
reflect evolving tastes. The rationale is simple: As we fill our stomachs
with food and homes with appliances, we spend relatively less on products
and more on services. That's why, after a certain level, demand for manufactured
products does not keep pace with increases in incomes. Expenditure patterns
of Indians are already beginning to show change in tastes (see chart).
Some boom
in the services sector is also illusory. Most of the household services
are actually replacing work once done by members of the family. Restaurant
meals are one example. On a per person basis, there are no more meals
being prepared today than in the past. It's just that a higher proportion
were cooked at home, which government statistics do not count. The same
goes for services like daycare and housework.
The biggest
and most diverse it may be, but the services sector can't keep growing
by itself. Though most economists expect services to touch 60 per cent
of the economy in 10 years, the quality of that growth may not be good.
As Mukherji warns, "What's the big deal if there are more 'service'
employees cleaning roads and human waste than writing software programs
or doing research?" Trite as it may sound, services need efficient
telecom, transport, roads and power as much as industry and agriculture.
The global industry is able to make better use of India's it boom than
the domestic industry. M. Govinda Rao, chairman of the government-appointed
committee on service taxation, says, "Industry abroad is in a much
better position to use our it talent than the local industry." Evidence:
more than 70 per cent of over $6 billion software services are exported.
Lessons
from the stunted growth of industry and agriculture are the best guides
to promotion of industry. From a pan-economy viewpoint, the distinction
between products and services is at best arbitrary. If a consumer buys
a car, it counts in the product category. Repairing or renting it is a
service. More cars mean more mechanics. Building a TV set is product,
equipping it with cable programmes is a service. IT, the focus of the
services boom in India too is a borderline activity, impacting both products
and services. Explains Rao: "it impacts both products and services.
It's just that right now service industries like banking, accountancy
and insurance are better placed to harness it than the manufacturing sector."
Services
could also be used to relieve industry of the disproportionately large
tax burden that it has borne in the past 50 years. In 1999-2000 services
taxes yield a measly Rs 2,072 crore. But the government is hopeful of
raising this figure to Rs 10,000 crore by 2003. That, hope experts, could
allow the government to reduce excise duties on manufacturing. Service
is also touted to turn India into an export powerhouse. Exports of software
and entertainment (including radio, music and TV) alone are projected
to shoot up to $55 billion by 2008. That's 20 per cent more than India's
total exports in 1999-2000. The other big opportunities are in healthcare,
education, tourism and publishing.
But all
the promise that services hold out could vanish if the country fails to
invest more and better in human resources. Already the gains of the it
revolution are heavily biased towards better educated people and therefore
the better equipped regions. India has underinvested in education. The
quality of human capital varies from world class computer engineers to
complete illiterates-and in India more fall in the second category. In
the age of brain power, there is no guarantee of economic growth unless
we find ways of creating the human capital demand by the information age.
And, as Debroy points out, education isn't just studying hard. "The
knowledge economy is all about creative thinking and risk taking. But
our education system lays stress on standardisation and fosters risk aversion,"
he says. Relearning, adapting to change and honing skills will be critical
to avoid the digital divide that is already evident in Indian industry.
For, more than anything else, the New Indian Economy is about the people
business.
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